The Australian dollar has been in a tailspin lately, particularly against the US dollar.
This week, the Australian dollar sank to as low as US63.63c, the lowest since last November. Excluding that dip, and a sharper one during the early Covid pandemic panic – when it was buying only about US57c – the dollar hasn’t been this weak against the greenback since the global financial crisis in 2009.
It’s a similar tale for the dollar against the euro. It was buying less than 59 euro cents on Friday, which – if you exclude the Covid dip – was also the lowest since the GFC.
British visitors in Australia for the World Cup will be enjoying almost $2 for every pound. Beyond the Covid slump, the last time the dollar was this weak against the pound was during the Brexit poll when Britain voted to leave the European Union.
But the US dollar is the comparison currency Australians typically hear about. Although only a small portion of bilateral trade is done with the US, most of Australia’s exports are US dollar-denominated commodities, so the exchange rate matters.
What’s causing the recent slide?
Two main factors are at play. The US economy’s surprising strength has led to expectations that the federal reserve will raise its key interest rate again beyond the July increase to a range of 5.25%-5.5%.
By contrast, the Reserve Bank of Australia has left its cash rate unchanged at 4.1% since June. Two batches of weak data – from modest wage increases to an uptick in the jobless rate – have reinforced expectations lately that the RBA’s work is done.
The difference in those two interest rates – which might yet widen further – will steer investors to buy US dollars and sell Australian dollars.
The other big influence is China’s surprisingly weak economic rebound from its severe Covid lockdowns. Deflation in July – contrary to the price issues mostly elsewhere – has only stoked those concerns.
The Australian and New Zealand dollar are often seen by investors as a proxy for China because of the economy’s trade exposure. Australia’s exports to China (including Hong Kong) are about as large as the next four partners combined.
The RBA cited “China’s uneven recovery from Covid-19 restrictions” as the top of its list of “key domestic uncertainties” in its latest quarterly statement of monetary policy.
‘Doom loops’
Ray Attrill, head of foreign exchange strategy for NAB, says forex markets “can be very fickle and very dramatic”.
His team is currently revising its view that the Australian dollar would be about 70 US cents by the year’s end, an outcome looking “increasingly untenable”. Instead, the so-called psychological level of 60 US cents is “getting a lot of airplay” but that isn’t the NAB’s prediction – yet.
A “doom loop” is under way as Japan, China and South Korea in turn let their currencies weaken to shore up their export industries. Attrill says it remains “an ongoing function of the Bank of Japan’s policy setting” to keep the yen weak against the US dollar.
“It’s making the monetary authorities in other parts of the world – no more so than in China – to not want to have Japan steal a march in terms of export competitiveness,” he says. “So they’re becoming tolerant of weakness in their own currency.”
A weaker yen has also delivered Japan higher levels of inflation after decades of deflationary risk. It’s an outcome that might now appeal to China too.
The link between commodity prices and the Australian dollar also appears to have become less reliable. Traditionally, if commodity prices went up, so did the dollar, and vice versa.
More recently, the US dollar and commodities such as oil have traded in the same direction. Attrill attributes the shift in part to supply mayhem, particularly in the wake of Russia’s invasion of Ukraine, which have masked the actual supply-demand balance.
What does it mean for Australia?
Nobody knows where the Australian dollar will end up in 2023, but the trajectory of Shanghai’s top 300 companies share index might be one proxy to watch, Attrill says.
In the meantime, “all our export clients [are] pretty happy bunnies” as they enjoy “a windfall when they’re translating mostly US-dollar earnings back into Australian dollars”, Attrill says. Many overseas visitors, including for the World Cup, will also have been more inclined to spend.
He says importers will be suffering “a world of pain” if they are bringing in, say, ceramic tiles from Italy, but less so if they are importing from China, where the currency has been moving in tandem with Australia’s.
Whether they pass on the cost to consumers will depend on their pricing power, Attrill says.
The RBA noted in its recent statement that the dollar was “broadly around its levels in May on a trade-weighted basis” but had “depreciated of late”.
A tumbling dollar would act as an automatic stabiliser for the economy by supporting growth through more exports and reduced imports.
NAB is alone among the big four commercial banks to forecast another RBA interest rate rise, and a weaker dollar may force its hand.
“With the currency doing what it’s doing, it’s got to add to the risks that they will be minded to raise rates further,” Attrill says. “And, obviously, if that happens, that would be a supportive influence for the currency.”
