Is the future for the Australian dollar downwards?
AUD/USD has been a strong performer in the currency markets, returning just under 30% since its March lows. We talked about how the Australian dollar was poised for a rally on a market recovery earlier this year.
The market has recovered, and the Australian dollar has recovered with it. This was due to the Australian dollar being mainly a “commodity currency,” with manufacturing worldwide slowly starting to pick up, specifically in China. Erik Nelson from Wells Fargo stated that “If you consider some of the fundamentals in Australia, you can justify the valuation of the Australian dollar at current levels” and that Australia is “very well positioned right now” about its exports to China.
However, the AUD/USD has fallen over 3% in the past couple of days. This has been on a multitude of factors, the US Dollar strengthening on Donald Trump’s recovery, recent weakness in the oil prices, and the tremulous Coronavirus situation in Australia have pushed the Aussie lower.
Is this a long term trend for the Australian dollar, or just Market Volatility?
Yesterday, the RBA left rates at 0.25%, which it has been since the initial rate cut in March. RBA’s Governor Philip Lowe stated that the decision was based on the uneven recovery of the global economy due to the Coronavirus – “The global economy is gradually recovering after a server contraction due to the pandemic. However, the recovery is uneven and its continuation is dependent on the containment of the virus”.
Analysts are predicting a rate cut in the next six months. However, there is little chance for rates to fall into the negative as Governor Lowe historically has been against negative rates, citing that they are “extraordinarily unlikely in Australia” due to the documented downsides on consumption sentiment.
Furthermore, Australia has been able to control its second outbreak in the state of Victoria, enabling them to focus on the path to recovery from the Coronavirus. The RBA also stated that “Labour market conditions have improved somewhat over the past few months and the unemployment rate is likely to peak at a lower rate than expected”
With elections coming up in the United States, the Trans-Tasman bubble between New Zealand and Australia coming to fruition, and Australia slowly recovering, market volatility may affect the AUD/USD pair, rather than a long term trend. I believe the Australian dollar’s tailwinds are a lot stronger the potential headwinds it may face.
Anish Lal has some excellent analysis on the recent market drop due to Trump’s tweet – you can watch it here.
