Bank of America Merrill Lynch predicted yesterday that the Australian dollar-to-US dollar exchange rate will fall to 0.7 within 2017 – a move that would mark a near-6% fall from yesterday’s closing rate of 0.7426.
Analysts at the bank have come to their conclusion following an in-depth analysis of Australian steel production rates and port shipment data, both of which they see as indicative of likely currency direction, and both of which are declining.
Any such fall would add to the Aussie’s current 4.2% decline in its US dollar buying power since March-21.
An AUD/USD exchange rate of 0.7 hasn’t been seen since February 2016 and a move to that level would bring the pair close to its post-2008/9 financial crisis lows at 0.6827, set in January 2016.
Recent weakness in the Australian currency has coincided with a tumble in the price of iron ore – Australia’s largest export – from highs in March around $89 per metric ton (NYMEX iron ore futures, 62% content) to $62 this week, but this fall is merely a small part of a much broader crash in commodities prices which began in 2011.
In 2011, iron ore fetched as much as $190 per metric ton and prices for Brent and WTI oil were close to $127 and $115 respectively (now $51.17 and $48.14). With commodities so highly prized, in both May and July of 2011 the exchange rate for AUD/USD exceeded 1.1.
Another reason for a broad decline in the value of the Australian currency versus its US counterpart has been the diverging paths of monetary policy between the two countries.
Among the G10 central banks, only the US Federal Reserve has entered a tightening cycle, which combined with a record low Australian interest rate of 1.5%, has driven down the large rate premium that Australia once held over the US, which for so long attracted a steady flow of funds into AUD. With no increase in Australian rates imminent and with US rates now at 1% and expected to climb further in June, the reasons for holding Australian dollars are now fewer than they were.
Economic Data Continues to Disappoint
As if another reason were needed for AUD weakness, Australian economic data continues to disappoint.
Adding to disappointing retail sales figures last week, this morning investors learned that the Westpac-Melbourne Institute survey of consumer sentiment fell by 1.1% in April and that it remained in “pessimist” territory for the sixth consecutive month.
Also this morning, data released by the Australian Bureau of Statistics showed that wages had grown by 0.5% in the first-quarter of 2017 – in line with market expectations but accompanied by a downward revision to 2016’s Q4 number (revised to 0.4% from 0.5%). The data does little to contradict the ongoing story of stagnant wage growth in Australia, something which for some time has been a concern for central bankers in the country amid an environment of rapidly appreciating house prices and elevated levels of household debt.
Australian Dollar vs. the Euro
Against a resurgent euro, the Australian dollar also fell to fresh 8-month lows yesterday, breaking the 0.67 level after one-week rallying away from it.
In early trade on Wednesday morning, now at 0.6681, the AUD/EUR exchange rate has also broken below the major 50% Fibonacci retracement of the August-15 to February-17 rally, which stood at 0.6693. In the field of technical analysis, Fibonacci retracements are an important tool used by traders to predict areas of support (where prices might stop falling) and resistance (where they might stop rising) in financial markets.
Beat the Drop and Change Money Now
For those in Australia whose hearts are breaking at the thought of AUD/USD rates at or below 0.7, consider changing your money now.
For those in business or perhaps making large payments in a foreign currency, such as that for an overseas property, you might also consider an FX forward or FX option, which are both efficient tools for hedging FX risk.
For those who do want to change their Australian dollars now, use BestExchangeRates.com’s comparison calculators for AUD foreign currency transfers and AUD travel money which, as always, will show you the cheapest company with whom you can do this online.
Author: Joel Wright
You can get in touch with Joel via email here or via the contact page.