This is the fourth article in our blog series on what businesses need to know about key global currencies in the second half of 2018. Sign up for our weekly FX newsletter to get these articles sent straight to your inbox.
In this article, we'll take a dive into what'll drive the Australian Dollar in H2, with a focus on political, economic, and financial events that will affect the Aussie. Here's what global businesses will need to watch in the coming months.
So far, 2018 has seen the AUD/USD currency pair decline almost 10 percent from a high of 0.811 in January to a low of 0.731 in July, largely as a result of global central banks raising interest rates while the Reserve Bank of Australia (RBA) has maintained their own at 1.5% - a record-low interest rate in over 25 years. As we enter the second half of 2018, escalating global trade wars, commodity prices, and possible monetary policy movements will likely impact the Australian economy and AUD.
Trade war impact and China's financial system
Australia's economy is fueled by
global trade and international
investment - and it depends
considerably on China.
Investors are remaining cautious of Australia due to the escalating trade war between the world's two largest economies, the United States and China, as a result of Australia's close proximity to the latter. The Trump administration began the trade war by imposing $34 billion of tariffs on Chinese goods. China responded swiftly with its own tariff imposition on U.S. products. Among many economics commentators, Bank of England Governor Mark Carney has warned that if Trump continues escalating, the global economy will suffer as a result.
Australia's economy is fueled by global trade and international investment, and it depends considerably on China - its biggest trading partner - which is also a big investor in Australian industry. Therefore, the global trade wars now taking place are highly likely to stifle investment into the country as well as hit Australian exporters.
Other Articles in this Series
Australia's dependence on China, the prime target country in Trump's tariff initiative, is particularly ominous, and will likely lead to downward pressure on the Australian dollar. The Australian Chamber of Commerce has said that Australian products made in China might struggle to find a market "without open access to the US."
China's increasing debt is also a growing concern for Australia, as it may lead to an economic growth slowdown. Given Australia's need for a strong Chinese financial system, any such slowdown would directly affect the Australian economy.
The Impact of Commodities
Given the fundamental importance of commodities to the Australian economy, economists have said that they will drive the fortunes of the Australian dollar through the remainder of 2018. Meanwhile, the Australian government said that the boom in mining exports is coming to an end.
Demonstrating the importance of commodities to AUD, the RBA previously said, "A major corollary of the mining boom has been a sustained appreciation of the Australian dollar." Now with predictions that commodities exports will tail off, the currency will likely face downward pressure.
Record-Low Interest rates
The years-long central bank appetite around the world for dovish monetary policy—including low and even negative interest rates, as well as quantitative easing policies—has given way to more hawkish positions. Central banks such as the Federal Reserve and the Central Bank of Canada have carried out interest rate hike cycles, whereas the European Central Bank has called time on its monetary easing policy and Japan has begun to discuss ending its own. This change in global central bank approach has created downward pressure on AUD.
Record-low 1.5% interest rates have supported the economy but financial markets expect RBA to start raising
rates in 2019.
While the record-low 1.5% interest rate has supported the Australian economy, financial markets generally expect the RBA to raise this level in the latter half of 2019, having lowered it from 2% in 2016. However, as 2018 draws to a close, speculation will likely pick up pace, creating upward pressure, as investors turn to a more attractive AUD.
What your business needs to know
For global companies that operate in AUD, the second half of 2018 will see the currency come under sustained pressure. Considering the U.S.-China trade war, Australia's reliance on an increasingly vulnerable Chinese economy, and commodity price volatility to RBA interest rate hike speculation, there are numerous large market forces at play.
To offset the potential for FX losses impacting on profit margins, accounting and treasury departments should both stay in tune with market events and consider hedging their risk, protecting their downside by ensuring that an established minimum exchange rate is guaranteed, while providing upside potential for more favorable AUD movements.
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