- Posted by Sean on January 15, 2016 in Banking Global Economies
Despite being only a number of weeks into 2016, global financial markets have opened to a pretty rocky start. Slumping commodity demand from China, one of the world’s largest consumers, has led to an oversupply (and price crash) of oil, iron ore, and copper. This caused substantial falls in both the US and Australian stock markets and set the currency markets into a frenzy. But what happens next? We’re going to take you through our predictions for the AUD/USD over the next year or so.
Exports are important when considering currency pairs. As Australian exports are demanded internationally, the demand for the Australian dollar (AUD) to purchase these goods also rises, and vice versa. Among Australia’s main exports are iron ore (making up 26% of exports), coal (16%), and petroleum substances (around 9%), while the US’s main exports are petroleum (7.2%) and vehicles (around 10%) -including planes, cars, and helicopters. While both countries are being hit by downturn in oil prices, Australia faces additional trouble with iron-ore which is pushing demand down for the AUD, relative to the USD. Global demand for coal, a traditionally “dirty” fuel, is being shunned by climate-change fighting nations who are moving towards “clean” solar energy. As a result, there is good evidence to say the AUD/USD may fall in the near-term. In spite of this, Australia can extract iron-ore resources at minimal cost, making it a “low cost producer” compared to its competition – Brazil. This margin-buffer means that Australia can continue to produce its main exports, even if prices slip further. This also means that there could be plenty of “upside” (room for the price to rise substantially) in the price in years to come. In any event, the outlook over the next 12 months looks bleak.
While China isn’t everything – and India may soon fill China’s “global growth powerhouse” shoes (thus increasing global demand for copper, iron ore and coal), this doesn’t look set to happen over the next year. In fact, it seems that India’s economic growth has been recently startled by contraction of its manufacturing industry. The Chairman of the Securities and Exchange Board of India (SEBI), has voiced concerns that the Chinese slowdown leaves global growth (including India in particular) uncertain. To make matters worse, 20% of India’s exports are made up of refined petroleum – meaning sinking oil prices are hitting India substantially. It seems that a “rescuer” for the commodity supply glut is unlikely.
Inflation, Interest Rates, and Employment
The US economy has shown strong recovery from the GFC in 2008, with the Federal Reserve opting to raise interest rates in December 2015. This increased the demand for USD, and the price, relative to the AUD. Job data and employment figures out of the US are strong, meaning that the overall economy is in a healthy position. There is evidence to suggest that the Fed may raise rates again, but given global financial uncertainty, this seems unlikely.
While concerns are low, the chances of a US recession are considerable. While this would make Australia’s economy look relatively stronger, it would cripple one of its major trading partners. Unfortunately, as unlikely as it may be, it seems that a US recession coupled with China’s slowdown would cause a catastrophe.
Australia’s reserve bank lowered their interest rates to raise spending in the economy in May 2015. This had a large impact on Australian housing debt, as there tend to be large outstanding mortgages and financing repayments as a great proportion of Australian income.
A fall in commodity prices may lead to weak employment data from Australia – as you can imagine, if the mines are making less money, they’ll take on less workers and pay their existing workers less. However, currently according to the Australian Bureau of Statistics (ABS), Australian employment figures are strong and continues to stay this way. This may be due to the Australian economy moving away from commodities as a staple – focusing more on financial services (the ANZ, Commonwealth, Westpac and Macquarie Banks in particular). However there are concerns that the ABS statistics aren’t convincing, using too small, biased samples to skew the data. Time will soon tell as to the health of employment in Australia. If the consensus is good, this will increase demand for the AUD. If not, the currency could be in for quite a severe drop.
This leaves the Reserve Bank of Australia in a bind. On one hand, if they reduce interest rates further, devaluing the AUD/USD, it may simply lead to households choosing to take on even greater levels of risky debt that they may not be able to pay off. On the other hand, increasing interest rates (boosting the AUD/USD) will reduce the amount of disposable income people have, reducing their ability to spend in order to offset the trouble faced by local commodity producers.
So will the AUD/USD rise or fall?
No-one knows for certain whether the Australian dollar will weaken or strengthen against the USD.
If you’re looking to transfer money between Australia and the US, OrbitRemit has you covered. Check out our calculator on the top right hand side of the screen to find out more.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the author’s – not necessarily that of OrbitRemit or any of its affiliates, subsidiaries, officers or directors.
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