What’s in store for the Australian Dollar (AUD)?
On paper at least, it’s a country that hasn’t experienced a recession in more than two decades. Yet high unemployment figures and a lacklustre manufacturing sector demonstrate that Australia is far from immune to what’s happening globally. There’s currently a process of rebalancing happening in Australia; namely, a desire to become less reliant on exploitation of natural resources in favour of services and manufacturing. What does this mean for the nation’s currency? Here’s what’s been happening and what traders need to look out for…
The big picture: how Australia has weathered recent storms…
2015 has seen Australia rack up 24 years of continuous economic growth. On first glance, it may seem that it’s a case of business as usual on the cards for the medium term, with the International Monetary Fund (IMF) predicting that growth is on target for 2.8% in 2015: i.e. the type of figure that would be looked at with envy by any European finance minister.
So how exactly has Australia managed to maintain an upward curve? Firstly, take a look at the country’s list of main trade partners. By a considerable margin, China receives the lion’s share of Australia’s exports (29.5%) followed by Japan (19.3%), South Korea (8%), and India (4.9%). In simple terms, for its vast building and infrastructure schemes, China over the last couple of decades needed to look somewhere for coal and iron – and that ‘somewhere’ (to a large extent at least) was Australia. So while Europe and the Americas were floundering post-2008, Australia was able to rely on this special relationship with China to carry it through.
The problems begin when Beijing tweaks its list of priorities. The reality is that if China ‘coughs’, Australia is at serious risk of catching a bout of pneumonia. China has scaled back considerably on its huge capital projects over the last few years, partly in a concerted effort to create a more consumer-led economy. The price per-metric tonne of iron ore plummeted from $130 to $50 between the beginning of 2014 and April 2015 and coal has more-or-less halved in price over the last 4 years. This has led to the realisation among Australian policymakers that over-reliance on the mining sector to drive growth is something to be avoided.
What Australia is trying to do – and what this means for AUD
The headline GDP figures don’t give the whole story. Over the last few years, the Australian media have started referring to a ‘two-speed economy’, referring to a divide between those regions that have benefitted from the mining boom (notably Western Australia, Queensland and the Northern Territory) compared to, say, Victoria which has seen a much slower growth rate. Manufacturers have been finding it especially difficult to compete, as shown by the shutdown of Ford, Holden (part of GM) and Toyota in quick succession. Unemployment peaked earlier this year at 6.4%.
The emphasis is now on stimulating manufacturing and on fostering growth in areas such as tourism, financial services, agriculture and higher education. The view of the Reserve Bank of Australia (RBA) was that if growth in non-mining areas was to get off the ground, the Aussie Dollar had to fall in value. Two years ago, for instance, AUD and USD were on a par. Two things have helped to put pay to that since then: the fall in commodity prices and interest rates cuts (the base rate is currently at an all-time low of 2%).
Currently, 75 US cents will buy you an Aussie dollar. At the beginning of the year, most predictions were that 2015 would see AUD finish at the 70-75 US cent-mark. More recently, projections have been heading south, with Morgan Stanley predicting a month ago that the currency will drop to 68 US cents by the end of the year.
Trading AUD: What should I look out for?
Interest rates announcements
The Australian cash rate may not have bottomed out just yet. Morgan Stanley pointed to a possible further rate cut to 1.75% by the end of the year – most likely in the fourth quarter. Low interest rates have already helped to boost a lacklustre residential construction sector, although the danger is that going too low will lead to the beginnings of a property bubble in hotspots such as Sydney. As well as construction data, look out for figures on business investment levels. A further rate cut will almost certainly be regarded by the markets as a signal to carry on selling AUD.
Commodities Prices
Australia is the third biggest gold producer in the world and, notwithstanding the renewed focus on non-resource sectors, if not just gold but also iron ore and coal go up or down, AUD has a habit of following suit.
China
Although the real estate market in Beijing, Shanghai and Guangzhou seems to be picking up, Chinese construction remains in the doldrums. Land purchasing by developers, for instance, is reportedly down 40% on a year ago. China gets almost half of its iron ore from Australia – so if you’re trading AUD, China construction figures need to be on your radar.
New Zealand
In economic terms, the trans-Tasman Sea relationship is more important to New Zealand than it is to Australia. After China, Australia is the second largest recipient of New Zealand’s exports – whereas New Zealand is Australia’s fifth largest export market. But that’s not the whole picture: more than 17,000 distinct Australian businesses export to New Zealand compared to the 5,000 who export to China and New Zealand is its larger neighbour’s third largest investment destination.
Broadly, if trouble is afoot in the Australian economy, this puts significant downward pressure on NZD. Local difficulties in New Zealand, while not irrelevant, have less of an impact the other way.
The rest of the world
AUD isn’t regarded ordinarily as an automatic safe-haven currency – but then again, these aren’t exactly ordinary times. If money starts flowing away from Europe, it has to go somewhere, in which case Australia may start to look increasingly attractive. Conversely, come Autumn, if the RBA cuts its rate again at about the same time that the US Fed starts hiking rates, (not to mention if the Bank of England moves towards a rate rise) expect AUD to weaken considerably against Sterling and the Greenback.
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