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The overriding factor that has driven the Australian dollar lower all year has been the ongoing Chinese economic slowdown, which with demand for global commodities massively reduced has led to a devastating correction to worldwide commodity prices.
An example of the scale of the decline can be seen via Australia’s largest export, iron ore, which had at one point dropped in value by as much as 45% as China’s demand tumbled. Commodity prices as a whole have entered bear market phase after having for many years been on a super cycle bull run. China’s economy, previously running at 10% plus growth year on year, has seen its economy decline to levels now below 7% growth for 2015.
With Australia so predominantly linked to China’s economy through trade, when demand for Australia’s natural resources diminishes this greatly impacts investment conditions for Australia’s mining industry. As cut backs have been made to Australian mining investment, unemployment has risen dramatically.
The Reserve Bank of Australia (RBA), clearly concerned by Australia’s economic slowdown, took measures to help boost spending by cutting its interest rate. The first reduction this year came in February when the interest rate was cut by 25 basis points to just 2.25%. The RBA cut its rate again before summer to take it to just 2%. RBA Governor Glenn Stevens has continuously made reference that the Australian dollar had been overvalued – the collapse of commodity prices together with economic fundamentals called for a weaker dollar, which was not only preferred but necessary to help Australia’s exporter compete.
The AUS/$ has fallen from 0.83 to at one point hit a low 0.69, its lowest level in 6 years, as the central bank policies of the USA and Australia diverge. The American Federal Reserve is shortly expected to embark on a cycle of interest rates rises into 2016, whereas you could argue for further interest rate cuts coming from the RBA still. The GBP/A$ has climbed as a result, having started 2015 at 1.83 to hit a high of 2.23 before settling firmly above 2.10.
In contrast to the US, across the pond in the UK the Bank of England has indicated that interest rates will not be increased until at least spring 2017. If they remain static the Aussie may maintain some of the strength it has gained over sterling in recent months, as we head into the New Year.
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