Forex Blog Articles

What You Should Know About the Aussie Dollar (AUD)

August 9, 2020 | 10:26 am | Forex Blog Articles
August 9, 2020 | 10:26 am
Forex Blog Articles
What You Should Know About the Aussie Dollar

A Close Look at the Aussie Dollar

The Australian Dollar AUD (Aussie Dollar) is quite a remarkable currency. Australia itself is not the largest or most prominent economy in the world. It’s not even in the top ten. But AUD is the fifth most traded currency. It’s rather volatile even when the global economy is reasonably steady. And also, its weakening benefits quite a few Australian businesses thus benefitting the country’s economy. 

However, the COVID-19 crisis has thrown a spanner in the world of AUD traders. The Dollar now behaves both as it should and shouldn’t during an economic recession. This makes forecasting more difficult. But overall, the prospects for this currency seem rather grim for the nearest future.

This article is an educational guest post, it was written by Kate Bregovic from sendmoneyaustralia.com

AUD Trends: A Look at Recent History

Looking at the trends in AUD exchange rates against the world’s top currencies isn’t going to give you much. The prevailing trend is that it’s strengthening. It has been doing this since the last crisis of 2008. But that’s to be expected as the Australian economy is recovering well.

However, there is also some volatility to this currency. It’s because of its unique position of being closely connected to the value of commodities. Australia heavily relies on export. The country is rich in natural resources and commodities trade is such a big part of its economy that their prices literally determine the AUD rate.

It’s because the countries that consume Australian commodities (mainly Asian economies) need to stock up on the AUD. This is how the currency is the fifth in the world while the country’s economy itself is only the thirteenth in terms of GDP.

However, despite its inherent volatility, the position of the AUD against top currencies is usually rather implacable. It’s weaker but slowly gaining strength against the USD and EUR. Therefore, anyone who needs to transfer money to the US or EU countries can plan their budget without much issue.

However, when it comes to Australia to UK FX transfers, the situation is quite different. The AUD is weaker than the Pound. But considering how volatile the GBP is because of Brexit, this currency pair is doubly-volatile. Therefore, anyone who needs to make such transfers open should use hedging tools and exercise every FX trading precaution.

How the COVID-19 Pandemic Affected the Australian Dollar

Simply put, the AUD crashed hard in the wake of the coronavirus pandemic. This wasn’t one of its usual zig-zags or even the fall of the 2008 crisis. This was a record-breaking crash where the currency pummeled in a single day creating many problems for everyone depending on its rates.

That said, it took about three months for the Aussie Dollar to recover to its pre-pandemic rates. Moreover, it has begun to get stronger, even despite the severe hit to global trade.

When the crash happened in March, investors dropped the AUD like a hot potato. The majority of them switched to the USD, despite the weakness of the US economy suffering from the COVID-19 impact. The result of the rapid depreciation of the AUD against the USD was an emergency dollar swap line. It was announced on March, 20 by the Reserve Bank of Australia and the Federal Reserve of the US. The RBA also arranged for similar swaps with a few other countries. Therefore, Australian firms got access to currencies they needed and the descent of the AUD stopped.

The same method was used during the crisis of 2008. It worked well then and considering that the Aussie Dollar has recovered in a few months despite the global economic recession getting worse, this time the method was also effective.

It must be noted that while the crash was triggered by the pandemic, the weakening of the AUD started before that. The trade war between China and the US was much more devastating for the Australian economy and the AUD. The country is closely tied to both those mammoth economies. Therefore, the tensions between them are affecting it deeply.

Australia’s situation was also drastically worsened by the tragic bushfires of the 2019-2020 season.

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AUD Rates: Impact on Businesses and Economy as a Whole

While the depreciation of the currency is usually a bad thing for the country, you shouldn’t forget that AUD is special. When this currency is getting cheaper, Australia is getting a chance to boost its global trade. Therefore, the economy gets some much-needed help for recovery.

In this particular situation, the industries that could possibly benefit from the COVID-19 pandemic are:

  • Iron ore mining and export.
    The mining of iron ore was only minimally disrupted by the lockdowns. However, the ore itself sells for the USD. Therefore, same levels of export will soon bring more money.
    Unfortunately, the demand for ore has gone down. Lockdowns stopped production lines worldwide. Thus, it’s unknown whether the change in rates will be enough to offset the reduction in demand.
  • Alumina production and export.
    Australia already is the world’s largest alumina production power. And the situation with this industry mirrors the situation with iron ore.
  • Natural gas export.
    Similar to metals, the producers and exporters of natural gas can benefit from the AUD weakening. But in this case, it’s the collapse of global oil prices that makes the situation not so good for Australia.
  • Medical equipment manufacturing.
    During the pandemic, this industry is experiencing an unprecedented increase in demand. In Australia, this manufacturing industry gains over 50% of its revenue from export. Therefore, weaker AUD benefits it.

As you can see, even in cases where the country can win from a weaker currency, there are serious issues. The COVID-19 crisis is extremely bad already and it might get worse. Australia will definitely experience more economic downturns as the second wave of the pandemic is already here. This means that the AUD will fall further down. But recovering won’t be as easy because the global trade Australia relies on has all but stopped.

What Does the Future Hold for the AUD?

According to the Australian government’s reports, the country’s economy is in the worst state since World War II. Moreover, next year looks to be even worse. Therefore, one cannot expect a miraculous rise from the AUD. In fact, it’s quite possible it will be steadily falling for some time yet.

At the moment, it holds reasonably well against the USD. In fact, despite the shocking fall in March, the AUD has already recovered to the point it’s in a better position than in December of last year. Still, now can be a good time to buy the USD. It’s the world’s reserve currency and it’s bound to keep growing stronger. Even the fact that America has been hit greatly by the pandemic and its economy is under tremendous pressure. Global investors and everyone else with money to spare will help keep the US Dollar in good standing by using it as a hedge.

The AUD is weakening against the Euro. It will, most likely, continue to do so. There is just no getting around the fact that the Australian economy is going through a very difficult time. With the reduction of global trade, it will be slow to recover. Therefore, the AUD/EUR pair will probably continue to shift in favor of the Euro.

However, the AUD/GBP pair is more of a mystery. For now, the Aussie Dollar is weakening against the Pound. But with the GBP being extremely volatile, this situation might change fast. Moreover, it might keep changing going into completely opposite positions. Simply put, the volatility of this currency pair will remain high.

All things considered, the AUD will keep weakening for a while. But a clever FX trader might benefit from this.

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