There was a lot of fuss about GBP in the wake of Brexit. Then EUR made headlines due to the concerns of bankers about political uncertainties. There is not much noise about AUD that dropped to a four-month low on 4 May as AUD/USD traded at 0.73. What are the reasons behind this drop besides the US dollar getting stronger? There are certainly no political instabilities as in the case of EUR and GBP.
AUD IS CALLED A COMMODITY CURRENCY FOR A REASON
There are domestic as well as foreign factors influencing the currency. It seems that commodity optimism is cooling off and renewed OPEC cuts have failed to lift the oil prices so far. Iron ore and coal, the key export commodities of the Australian economy, have recovered from the recent drop but are still below the peak of 2011. China has announced strict measures to counter real estate speculations and credit growth in 2017, which could be another factor of reduction of demand for iron ore and demand for Australian property. In April Australia already had to bear a large part of the decline of Chinese imports. New iron ore supply is also expected on the market in 2017 from the restart of production by the Brazilian miner Vale. We should bear in mind that the recent trade surplus was a result of higher prices, not so much of increased volume. We also need to wait for the May import figures from China to see if the drop was not simply a consequence of extreme weather disturbing transport in Australia.
The US economy is another foreign factor to consider. If President Trump can get his stimulus plan in operation, a raising in interest rates is likely to follow, causing money to flood back to the US seeking a safer haven than developing countries and increasing the cost of dollar-denominated debt.
CURRENT REAL ESTATE MARKET CONDITIONS CANNOT LAST
The two main threats to the Australian economy are a renewed drop in iron ore and coal prices and a significant correction of housing prices. The real estate market rose to double figures in 2016, surprising many analysts. However, this can’t go on much longer and the only question is, will this correction come through an interest rate hike or market glut. Moreover, some researchers point out the apartment glut is already here for some areas of the continent. Until an interest rate hike happens the best way to anticipate the AUD’s behaviour is likely to be movements in the iron ore markets.
Even though RBA expresses confidence in the accelerating economic growth in the second half of 2017, the above-mentioned factors are not likely to allow a cash rate hike until 2018. The Australian economy may look robust at a first glance, but there are a lot of potential events that must be avoided or at least mitigated in order for us to see a significantly stronger AUD soon.