The Australian dollar has been weaker in the last couple of weeks as a fresh series of Coronavirus cases and news dampens the previously more buoyant attitude towards the Aussie dollar. The country has staged quite a U-turn in recent weeks having previously appearing close to eradicating the virus.
Last week saw the worst day for deaths albeit with low infections, and Melbourne has been placed under a strict lockdown since 3rd August. The Australian currency has weaker ever since news emerged of the virus striking back in Australia, there is an economic cost associated with this bad health news.
Rising infections typically mean lockdowns, and lockdowns suggest lower economic activity. The Australian dollar has been performing quite well in the immediate aftermath of the global pandemic in July, reaching a high against the pound of 1.77, some of the best levels for the Australian dollar against the pound since September 2019.
The IMF is predicting Australia’s economy could shrink 4.5% this year, which will clearly place a burden on the Australian currency as investors second guess the next moves. Over the years a high Australian interest rate has been a key component of Australian dollar strength but with interest rates at record lows of 0.25%, there is not too much for investors to get excited about.
Having said that, Australia’s central bank the Reserve Bank of Australia (RBA) doesn’t have negative interest rates like many central banks such as Europe’s ECB (European Central Bank), Switzerland’s SNB (Swiss National Bank) and also the Bank of Japan.
The Aussie dollar is sometimes a ‘commodity currency’ since its strength can be linked to the performance of certain key commodity exports like Coal and Copper amongst others. When there is increased global optimism, the Australian dollar can rise, in the face of global uncertainty the currency can fall. It is not just domestic issues that will form part of the conversation for the Aussie dollar in the coming weeks.
What Global Factors Might Influence the Aussie Dollar?
Global sentiments on trade will likely be key to the Aussie, as markets try to assess whether the worst is yet over, and what the prospects are ahead for the world and the Australian economy in that picture.
Importantly we need to look at China, who are Australia’s main export market and for whom markets closely monitor both political and economic sentiments to provide some direction on the Aussie dollar. As there is confidence over China and the outlook from Sino-relations with not just Australia but the rest of the world, the Aussie can rise. Where there is concern and fear about how the world engages with China and vice versa, the Aussie can fall.
Just lately China has of course been in the headlines as markets try to understand the root cause of the Coronavirus and determine how the Sino-US trade disputes will play out. Throughout the volatility of the Trump and Xi Jinping trade talks, we often saw volatility for the Australian dollar as markets tried to second guess the outcome.
The direction therefore of the US Presidential elections look set to be a key reason for concern ahead, as we get closer to better understanding just what lies ahead for this key power struggle between the US and China. Will a change at the helm of the United States see a change in this tricky standoff, or will Trump remaining in power lead to greater confrontation?
For the Australian dollar the global outlook is very important in shaping direction and attitudes for the currency, and for determining how the RBA might respond too, to these ever changing sentiments which form a key part of decision making on policy.
All in all, there are still many directions some of these key events could take, and it will ultimately be the outcome from those events and the market reaction, which determines how the Australian dollar and other currencies will perform.
The Coronavirus has made the currency markets even more unpredictable and volatile in many respects, and we can help share with you the latest news and provide tools to help provide you make an informed decision and strategy on your transfer.
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