Australian Dollar Cheers Unemployment Data Amidst Tremendous Pressure This Year

AUD/USD rose by 0.5 % to $0.6877 after ABS released jobs data showing an unexpected dip in December unemployment figure.

According to ABS Chief Economist Bruce Hockman, the unemployment rate (seasonally adjusted terms) decreased by 0.1 % points to 5.1 % in December 2019.

The domestic economy is showing recovery signs with positive data released recently on jobs market, housing market scenario, trade surplus and retail sales.

ALSO READ: ABS Updates: Job Vacancies and Building Approvals Data Get Better

However, Australia has been under pressure this year amidst several challenging global macro events, and the effect can be seen on the struggling Australian Dollar hitting six-week low on Wednesday.

The persistent global slowdown has been a hot-debated topic with increasing tensions in international trade including US-China trade war and more recently US-Iran tension. This has also laid direct impact, not only on the overall economy but also on individual currencies of the countries.

The AUD has significantly dipped since the opening day of the new year 2020.

Let’s have a look at some of the factors that have been exerting pressure on the domestic currency:

Slowing Growth in the Chinese Economy

The Chinese economy posted a growth rate of 6.1% in 2019, down from 6.6% in 2018. This is possibly attributable to the escalating US trade pressure and the soft demand domestically as well as internationally.

The growth marked the lowest annual growth for the world’s second-largest economy since 1990, but still within the government’s target of 6-6.5%. No wonder this brought to the table repercussions for the Aussie dollar falling ~10% since the beginning of the trade war, with the economy having close trading links with the Chinese economy.

Coronavirus in China

The already slowing Chinese economy due to the trade tensions with the US is prone to further slowdown due to the coronavirus that has spread to various cities in China including Beijing and Shanghai and the number of patients has more than tripled.

As an effect of the mounting problems for China, the AUD, often used as a proxy bet on the Chinese economy, has been enduring through a trough as low as $0.6827 on Wednesday.

There have been hundreds of cases reported in China with the people affected by the outbreak of the deadly coronavirus. The growing number of cases notifying the infected people have been raising concerns for the Chinese currency.

In an environment where there is financial as well as geopolitical uncertainty continuously looming, what else can we expect other than a fall in the currency value?

The struggling Chinese currency is expected to impact the Aussie along with other currencies.

US-China Trade Deal Impacting Australian Exports

The international consensus says that the global economy is moving away from recessionary zone amidst the Phase 1 trade deal reached between the US and China as well as the easing tensions in the Middle East.

However, the US-China trade deal might hurt the Australian exporters with the terms of the agreement that demand China to make imports for USD 32 billion worth of beef, wheat, cotton and all the other items from the US.

ALSO READ: What does Phase one Trade deal mean for Australia?

Although the trade deal is seen as a breakthrough in the bitter trade war dampening the global economic growth, the increasing imports of China from the US is likely to impact the Australian exporters.

Moreover, Australia was also a major exporter of LNG to China during 2019, which may reduce significantly, subject to the terms of the US-China trade deal binding China to make imports for LNG from the US.

No matter how much optimism prevails in the market post the US-China Phase-1 trade deal, there are possibilities in the current situation that the agreement could weigh heavily on the Australian economy.

Falling Consumer Sentiments

The Westpac-Melbourne Institute Unemployment Expectations Index is recorded as134 in January, slipping 2.9% M-o-M but up 8.4% on this time last year. This would translate that a greater number of consumers expect a rise in the unemployment in the year ahead.

Moreover, there is a decline of 1.8% in the Consumer Sentiment Index to 93.4 in January 2020 from 95.1 in the previous month, primarily due to the bushfire impact.

Impact of Bushfire

When looking for severe factors that are weighing down the currencies, one can easily say that it is coronavirus for China, and for Australia, it is bushfire.

Recent Australian bushfire have not only dragged down the economy and ecosystem of the country but have also reduced the confidence of the Australians. The consumers are losing confidence, as also reflected in the Westpac-Melbourne Institute Index of consumer sentiment.

ALSO READ: 4 Unexpected Costs of the Bushfire Crisis

The rising pessimism due to the bushfire has impacted the Australian dollar and is said to take a toll on the Australian economy.

Market experts forecast the vulnerability of the Australian dollar to remain in the market for some time amidst lesser consumer confidence.

The experts believe that the bushfire, along with the receding sentiment on the domestic economy is expected to have a negative impact on the economy, although in short-term. On the ground reality, the bushfire has severely damaged flora and fauna and cost heavily on the property damages.

Owing to the losses caused by the bushfire to the private as well as public property, several sectors including agriculture, insurance, travel, retail, mining are facing the adverse consequences.

Bottomline

With all the damage done, it shall be a challenge for the Australian economy to bounce back and make gains in the short run as well as long run. Any fluctuation in the exports and imports of Australia shall lay a direct impact on the demand for Australian currency as well as Australia’s foreign exchange reserves. As of now, the trade tensions are likely to ease with the US-China trade deal and cooled things in the Middle East. However, few uncertainties remain in place that may impact the currency movements in the AUD.

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