- Posted by Paul on October 6, 2014 in Global Economies
In the past few weeks the Australian Dollar has taken a pretty substantial hit against the US dollar, losing nearly three cents in one week alone. In this article we’ve put together a quick analysis of what has caused this correction and had a look at some factors that are likely to impact the value of the AUD in coming weeks.
The Australian Export Economy
One of the biggest things that exerts pressure on the value of the Australian dollar, is commodity prices. When it comes to international trade, the Australian economy is very reliant on high value mineral exports. Australia’s largest export commodity is iron ore and, as such, fluctuations in its value are a very good indicator of the value of the currency. A surge or decline in value of iron ore can have a dramatic effect on the value of the AUD, so it’s certainly something that currency speculators keep an eye on. One such surge occurred in the middle of this month, with the price of iron ore skyrocketing by nearly four full percentage points, and this resulted in a rise in the value of the Aussie Dollar.
Of course with any currency exchange, there are two currencies to take into account. If we’re looking at the value of the Australian dollar relative to the USD, then increases or decreases in value on both sides of the transaction need to be factored in. The USD has been steadily increasing against all major currencies in the past few weeks – this has a lot to do with the end of quantitative easing being on the horizon and the associated expectation that the Fed will be increasing interest rates later in the year. The announcement regarding the end of the Fed’s bond buying programme was made on the 17th and they confirmed that QE will be drawing to a close in October.
They have also said that interest rates will remain static for a considerable time after QE is ceased. That fact aside, analysts broadly agree that the value of the US dollar will continue to increase this year. The Fed has learned the hard way that they need to manage this process with extreme caution. Any sudden adjustments to the money supply could cause the American economy to contract, so they’ve been pretty clear about their intention to make it more of a gradual process.
Is the Mining Boom Over?
On the other side of the coin, back in Australia, the “mining boom” which has been responsible for the incredible performance of the Australian economy in recent years, is drawing to a close. The boom and the associated growth have largely been fuelled by China’s seemingly insatiable hunger for iron ore.
The Chinese are easily Australia’s biggest trading partner when it comes to Australia’s biggest commodity. The problem is, that the Chinese appetite for iron ore has started to decline and that has meant that the value of the commodity has been consistently going down since the middle of last year. Until Australia finds ways to correct this balance with other exports, it looks like the Aussie Dollar may be in for a pretty rough trot.
It’s impossible to predict exactly what is going to happen, but these two major factors, the end of QE by the Fed and the negative adjustments in value of Australia’s key exports, mean that it is likely that the Australian dollar will continue to decline relative to the USD for the foreseeable future.
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