The AUD/USD has been on the back foot since September of 2014. The ever-present threat of the U.S. Federal Reserve raising rates and eroding the interest rate differential that boosts the appetite for the Aussie continues to march on. The Australian dollar is now trading at a four-year low and support levels are well below 0.80. Last autumn marked a turning point for the currency pair even though the nonfarm payrolls (NFP) report in the U.S. disappointed in early September, as Chinese productivity and Australian employment would confirm a lower trend that continued throughout the last quarter of the year.
Reserve Bank of Australia Rate Cut Chatter Escalates
The Reserve Bank of Australia (RBA) held its rates for the whole of 2014. The Australian benchmark rate has stood at 2.5% for the past 20 months. The central bank expects the growth of the economy to remain moderate as global growth continues to slow down.
Given there is still room to cut going into 2015, the RBA could decide to cut to boost the economy. A lower AUD would increase the competitive advantage of exporters and get the rest of the economy back on track through consumption. A majority of analysts forecast multiple cuts in 2015 as monetary easing is needed in current global conditions.
The housing market and overall employment are two of the biggest challenges facing the RBA. Despite the housing boom of the last couple of years, many fear lower rates could further drive it into a dangerous speculative bubble. Employment has taken a hit in particular from cuts in the commodities sector. Lower demand for Australian products forced companies to shed jobs, leaving Governor Glenn Stevens hoping a lower AUD can make up the difference.
The RBA continues to insist that the Aussie dollar is overvalued. The market so far has agreed with the assessment but only after the other side of the equation, the U.S. dollar, has been boosted by continued economic growth.
Global Growth Slowdown Pressures Aussie Dollar
The Aussie’s trading has been driven down by positive American data like November’s NFP report which surprised the market by soaring above expectations (321,000 new jobs versus 230,000 expected). Of equal concern is the slowdown of Chinese growth which could prompt Beijing to further cut its economic growth forecast to 7%.
A weaker AUD/USD might not be enough if the economies of China, Japan, and Europe can’t find a way to boost internal demand as they will hit Australia on an overall trade-weighted basis. In order to reap the benefit of a weak currency, the Aussie has to drop to the 70-cent range, instead of the mid-80 cent range where it currently trades.
Australia’s political landscape is stable with general elections expected in 2017. The 2013 federal election resulted in a new coalition government that, so far, has performed well while battling strong headwinds.
AUD/USD in 2015
Australia does not fully control its economic fate. It depends too much on China solving its growth puzzle, which in turn would benefit Europe and Japan. The interest rate differential between some major economies will continue, but it will be a narrower gap if the RBA is forced to cut, and most forecasts point to that being the case. The Australian central bank may also be left with little choice but to consider an easing monetary policy as the Fed and the Bank of England move toward more accommodative policies in 2015.
The low demand for commodities and the constant pace of their supply has resulted in lower prices for everything from metals to agricultural products. Commodity-sensitive currencies like the AUD will face further challenges trying to leverage a weaker currency in what is shaping up not as a currency war, but a race to the bottom.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.