13 September 2018
Bob Cunneen, Senior Economist and Portfolio Specialist
Source: Reserve Bank of Australia.
After a period of remarkable calm over recent years, the Australian dollar (AUD) has fallen sharply against the US dollar (USD) (blue line) over the past six months. For a currency which is colloquially known as the ‘Pacific Peso’, the AUD’s slide to 0.71 is hardly surprising given the conventional wisdom.
The US economy is a strong performer currently with unemployment below 4% and annualised growth above 4%. The US Federal Reserve (Fed) is expected to continue raising interest rates. While Australia’s unemployment rate has gradually fallen to 5.3% and economic growth has picked up speed to 3%, the Reserve Bank of Australia (RBA) appears comfortable sitting still on interest rates. So the AUD seems destined to decline given higher US interest rates are likely over the coming year.
Yet the AUD is not a certain ‘one way bet’ to fall further. The USD still confronts the challenge of large US budget and trade deficits that require financing. Interestingly, one of the key fundamental supports for the AUD has actually improved this year. Australia’s key commodity prices as measured by the RBA have held up reasonably well (red line). Higher coal and natural gas prices this year have managed to offset lower prices for copper and aluminium. Provided that Australia’s key commodity prices remain resilient and the Australian economy maintains solid economic growth, the downside risk to the Pacific Peso could prove to be a temporary mirage.
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