Yesterday on BestExchangeRates.com, we suggested that now might be the time to change your Australian dollars into Canadian dollars, having seen the Aussie’s buying power reach 6-month highs on Tuesday.
Those words now seem prophetic, given what we saw yesterday in Australian dollar exchange rates. The Australian dollar tumbled across the board yesterday, including against the Canadian dollar.
At the end of the New York session, the traditional end of the FX trading day, AUD/CAD had posted its largest daily fall since April-2016 – a fall from highs near 1.0350 to 1.0190.
Against the US dollar, the Aussie experienced a similar loss, falling from highs near 0.7550 to 0.7422 by the day’s end.
As if to add insult to injury, following the outcomes of this morning’s FOMC meeting and economic data from Australia and China, the Aussie has fallen further still. In fact, from talking about highs in the buying power of the Australian dollar yesterday, as of writing at 04:15 GMT, we could now talk about multi-month lows against many currencies, including the Singapore dollar (new lows of 1.0352, a 7-month low), the British pound (0.5753, a 7-month low), the euro (0.68, a 4-month low), the US dollar (0.7407, nearly a 4-month low) and the Thai baht (25.61, a 1-year low).
Why Is the Australian Dollar Falling?
The Australian dollar is suffering from a fall in the price of iron ore – the focus of yesterday’s piece – but also from an evaporation of the interest rate premium it holds over the US.
As a resilient, developed economy, funds have long been held in Australia to earn the higher rates of interest typically paid on Australian dollar funds. Between 2008 and 2012, the national Australian interest rate averaged around 5%. By comparison, for much of that time, rates in the US were at 0.25%.
With rates in Australia now at record lows of 1.5%, with no imminent increase on the radar, and with rates in the US either climbing or expected to climb, the reasons for holding money in Australia are now fewer than they were, and the foreign exchange risk associated with holding funds in AUD is elevated, which forces yet further funds out of Australian dollars and drives the AUD/USD exchange rate down.
Three More Strikes Against AUD
As already mentioned, further to yesterday’s fall and the FOMC statement, this morning saw the release of economic data from Australia and China, all of which was negative for Australian dollar valuations.
For the layperson, or lay-Australian, who might wonder what China has to do with the value of their local currency, know that the economic health of China is vitally important to Australia’s national income. China is Australia’s largest trading partner by far. Data from Australia’s Department of Foreign Affairs and Trade shows that Australia does more than two times as much two-way business with China than it does with Japan, it’s second largest trading partner.
This morning’s data showed that China’s Caixin Services PMI has shrunk to 51.5 from 52.2 (below the forecast for 52.6), that Australia’s trade surplus has fallen to $3.11 billion from $3.66 billion (below the forecast for $3.33 billion), and that new home sales in Australia fell month-on-month by 1.1% in April, having grown by 0.2% in March.
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