The Australian dollar has come under pressure this week, declining for the last six consecutive sessions, to its lowest level against the US dollar since November last year. Weak data on Australia’s trade balance (US$3 billion deficit), indicative of a weaker than expected investment outlook, were instrumental to its decline which has boosted outperforming equity markets on Wall Street and in Europe as some investors expressed concerns that if the currency were to weaken further it could hurt Australian corporate profitability derived from exports.
The catalyst
For the Australian dollar’s weakness was the release of surprisingly weak data on Australia’s trade balance (US$3 billion deficit), indicative of a weaker than expected investment outlook.
Melbourne Mercer Investment Consulting analyst, James Hughes, said that “This is a direct result of plunging commodity prices and the resulting high local currency values.” He added that if the currency were to weaken further it could hurt Australian corporate profitability derived from exports. The weaker Aussie spurred gains on Wall Street and in Europe as some investors expressed concerns that this would eventually lead to a weakening investment outlook in Australia (Hammond 2015).
Forecast for AUD/USD: Aussie looks threatened
A downturn in the Australian economy will have the effect of pushing down the value of the Australian dollar. This can already be seen from last week’s data from Australia’s Bureau of Statistics showing that Australia’s merchandise exports fell by 3.0% in March 2015, while exports of services rose by 2.0%. In addition, Australia’s merchandise imports fell by 6.0%. The Australian dollar reacted to these data with a decline of over 1% against the US dollar.
The data has also put pressure on the Reserve Bank of Australia to cut interest rates. The Australian dollar is likely to continue to decline as the weakness in Australia’s merchandise trade weighs on business confidence. Fed rate hikes and further USD strength will also lend further support to USD-based commodity prices, which are already trading at multi-year lows.
What will be the impact of this?
Aussie looks threatened. The AUD/USD rate has been trading below 1.0500 for several days, and this level is currently under some pressure due to the weak trade data from Australia. AUD/USD can be poised to fall further in the coming days as concerns about Australia’s economy continue and give rise to expectations that the Reserve Bank of Australia will cut interest rates in May.
The AUD/USD exchange rate is near a five-year low as investors start to worry about whether Australia can avoid falling into another recession (Bell 2015).
Where will the AUD/USD exchange rate go next?
A continued softening of commodity prices and more signs that China’s growth is slowing will keep pressure on the Australian dollar. A rate cut by the Reserve Bank of Australia and a stronger US dollar could weaken it further.
What could cause a rise in AUD/USD?
An interest rate hike by the Reserve Bank of Australia, or that commodities begin to recover would improve sentiment toward the Australian dollar.
Then, a prolonged period of growth in the Chinese economy would support the Australian dollar.
What are the investment implications?
The Australian dollar is likely to continue to decline as the weakness in Australia’s merchandise trade weighs on business confidence and more signs that China’s growth is slowing will keep pressure on the Australian dollar. A rate cut by the Reserve Bank of Australia and a stronger USD would weaken it further.
In the event that the Australian dollar falls to US 60 cents and below, it would be worthwhile to consider buying AUD/USD on dips. However, if interest rate cuts are expected, this may not be as profitable as Australian bonds and high-grade corporate bonds.
