The Australian Dollar has been a volatile currency in recent months. This has partly been due to Chinese concerns about its economic outlook, the Covid virus, and commodity prices. It is also due to risk aversion in the market, and the looming threat of a global recession. Consequently, the currency has been underperforming compared to the US dollar.
In September, Australia’s consumer price index soared to an annual rate of 7.3%, the highest since 1990. Headline inflation slowed to 6.9% in October. RBA Chairman Philip Lowe weighed in on the issue, saying the high rates were having a “negative impact” on Australian households. However, he was not optimistic about a recovery.
The currency has been depreciating in the first half of the year, and is currently at two-and-a-half-year lows. Commodity prices and a weaker GDP are the main reasons for the decline. On the other hand, the US Dollar has gained despite the recession.
With the recent downshift of the Reserve Bank of Australia (RBA), the currency pair is entering the later stages of the cycle. This is expected to bring a steady demand for AUD exports, which should increase the trade balance. If this happens, the Australian dollar should recover gradually in the following year.
In the meantime, Australia’s economy is largely dependent on China, and its changes are already being felt. The country’s economic growth has slowed down, mainly as a result of China’s lack of willingness to loosen its zero-Covid policy. While the reopening of the China-United States trade relationship should help to alleviate some of the negative effect, it is unclear whether China will follow through on its plan to scrap penalties for those who catch the Covid virus.
Although the Australian dollar has been depreciating, the currency still remains a strong relative value versus the US dollar. The Fed has been front-loading interest rate hikes, and that is expected to continue. That, coupled with the expected interruption of the US dollar’s uptrend, should help to revive the Australian dollar.
One of the key factors weighing on the Australian dollar in the coming year is the global economy. This is in part due to a record-high number of Covid-19 infections, which could affect the demand for commodities. Additionally, the Fed’s ultra-aggressive rate policies have strengthened the US Dollar, and could lead to a recession sooner.
Another factor weighing on the Australian Dollar in the coming year is its exposure to other Asian economies. The Chinese government has announced that it will review the current Covid policy, and could decide to allow it to be relaxed if its effects were found to be less harmful. The Australian economy is a large exporter to the Asian region, and a change in the policies of the Chinese government could affect AUD prices.
A third factor that could influence the AUD in the coming year is the level of interest rate differentials between the Australian economy and other countries. Australia has a relatively high interest rate, and the RBA is taking steps to contain inflation. This should help the Aussie in the short term, but its strength may be challenged by a broader decline in the global economy.