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Booming Commodities Can’t Save Australian Dollar

The Australian dollar is at or near multi-month lows against a number of major currencies in spite of a rampant iron ore market — once a great influence on AUD.

The Australian dollar has, for now at least, decoupled from the commodity that once heavily influenced its value.

In international markets, prices for Australia’s largest export, iron ore, are rocketing. On China’s Dalian Commodity Exchange, futures contracts for September iron ore delivery were quoted last week at 797.5 yuan (roughly AU$167.50) per tonne — the highest price since iron ore trading was introduced on the DCE in 2013.

And yet the Australian dollar has slumped in recent days to its lowest levels since January against SGD, CAD, JPY, CHF and EUR, and to a lowly USD valuation of just US68.7¢ — 16 percent less than its best rate from last year.

The Aussie has been offloaded as investors have ramped up bets on aggressive interest rate cuts by the Reserve Bank of Australia. These cuts, investors believe, will be necessary in light of persistently soft domestic data, above-target unemployment and the fallout from a US-China trade standoff that shows no sign of nearing an end, or even easing.

Bond market pricing now implies a two-thirds probability of the RBA cutting rates by 25 basis points next month to a record low of 1 percent. Earlier this month, the RBA reduced the cost of borrowing for the first time in 3 years.

While lower interest rates might be great for Australian businesses and those hoping to borrow, they bode poorly for the Australian dollar, which already fails to pay a return that matches with its perceived “risk currency” status.

AUD forecasts from GSFM, ANZ, Capital Economics and Westpac all suggest further depreciation in the second half of this year. Against the US dollar, readers should expect rates between US65¢ and US66¢ before the year is out, analysts have said.

 
Please note that the opinions of our authors are their own and do not reflect the opinion of Best Exchange Rates and should not be taken as a reference to buy or sell any financial product.
 
 

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