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The Australian dollar is one of the most frequently traded currencies in the market and can be a significant factor in influencing trade and financial flows between Australia and the rest of the country. The value of it is established from the interaction of various macroeconomic factors which affect exchange rates.
The value of a currency is governed not only by the issues relating to the home/Australian economy but also depends on the strength and weakness of the currency with which it is being exchanged.
Australia has been under stress this year amid a persistent global slowdown, trade disputes, and challenging macro events globally. This has a direct impact not only on the economy but also on individual currencies of the countries.
The Australian dollar has fallen to an 11-year low as unemployment jumps, and coronavirus outbreak ruptures the currency. The currency has already been made unappealing by a decade long slump in interest rates.
The fifth most frequently traded currency stumbled below 66 US cents as on 27 February 2020, partially due to Australia being major commodity exporter to China.
The demand for raw materials from China has diminished as the coronavirus shutdown has brought manufacturing to a standstill. As per the data released by the Australian Bureau of Statistics, the jobless rate jumped to 5.3% in January 2020 from 5.1% in December 2019.
Below are the top 5 factors affecting the value of AUD-
1.AUD becoming low yielding risky asset
Interest rate differentials are one of the major factors to influence AUD's value. Investors invest in countries where rate of interest are higher. If other countries are offering better interest rates than Australia, investors will have a bend towards it which shall drive the Australian currency down as investors sell AUDs and buy other country's currency.
With wages barely rising, sky-high household debt and the reluctance of companies to invest, challenges are mounting for AUD. Investors seem to have little appetite for risk, making them indulge in the carry trade (Carry trade is a behaviour that involves buying currency and carrying it until one makes a profit on it.)
Investors are now borrowing AUD and selling it to buy a host of currencies ranging from Mexican peso to Indonesian rupiah.
None of this is going unnoticed by RBA. The cash rate for the Australian economy is at 0.75% at present. However, RBA Governor during his February meeting, hinted at a possibility of a rate cut if employment rates continued to decline and negatives outweighed the positives in the economy.
- Falling Commodity prices, slow growth and coronavirus in China
Australia has a particularly heavy reliance on commodities like metals and grains, amongst the developed countries. Terms of trade in Australia majorly is determine by Commodity prices as these prices command its exports making AUD follow the trend. Major reason behind this is if someone wants to buy exports of Australia, the trading partner need to do the transaction in AUD.
Coronavirus and resulting impact on growth globally have crushed commodity prices in recent times pushing iron ore and crude oil prices down. The commodity prices decline has dropped the fair value of the Australian dollar. Coronavirus has hit Chinese demand which imports about 72% of seaborne iron ore- Australia's number one export item.
- Bushfire has taken short term economic toll
Bushfires have been tearing through every state in Australia and is one of the significant factors in weighing down the currency. The AUD is expected to remain vulnerable due to low consumer confidence in the economy.
As per analyst Matthew Ross of Goldman Sachs, the bushfires could level a ~0.4% hit to GDP in near-term. With bushfires continuing to rage Australia, there is a fading sentiment on the domestic economy.
- Fears and Speculation all around
AUD is one of the most popular growth and risk proxy currency in the financial markets globally. It is often used as a trading device, to benefit from short-term changes in attitude towards global economic growth and market risk. This is partly because AUD is considered as a 'commodity currency'.
The Australian economy is profoundly affected by the changes in global economic activity since it is an open economy. Hence, when good sentiment prevails in the market, the AUD will often climb, but it will fall when pessimism prevails.
Sentiments play a crucial role in driving the currency value. The Australian share market has plunged as investors were spooked by the fears that a rise in coronavirus infections around the world will affect supply chains and hamper economic growth.
5. US-China Trade Deal might hurt Australian exports
Australia’s close trade links with China and other East Asian emerging economies have helped to protect it from the worst of the global downturn at the time of the global financial crisis.
While the US and Europe stumbled into recession, Australia has continued to pull strong growth and has maintained close ties internationally. This makes Australia an appealing destination for investors who look for low-risk exposure to East Asian growth.
After January 2020 US-China trade deal and easing pressures in the Middle East, the global economy is slowly shifting from a recessionary zone. However, with China agreeing on imports worth USD 32 billion, the deal might impact and hurt Australian exporters.
Despite the optimism that follows the US-China trade deal, Australian exports might get hit.
ALSO READ: What does phase one trade deal mean?
Other important factors that affect the AUD are the Australia-United States trade relations, are global oil and gold prices.
Analysts expect that if the current economic conditions are considered, AUD is expected to be weak in the short term.
Any fluctuations in exports and imports, global uncertainty in trade deals and expected interest rates are likely to affect Australian currency. With bushfires and coronavirus weighing down the AUD, it will be a challenge for it to bounce back in the short term.
