What does the falling Australian dollar mean and its future outlook

Shirley Liu 11 April 2016

Aus-dollar

In 2016, the Australian dollar was at its lowest since the global recession. Why?

It is the first time since 2009 that the AUD$ slipped below the USD$0.70 level. At the same time, oil prices slipped below USD$ and the Dow Jones traded at its lowest level since 2014. A lot of fingers are pointing to the mass market (the market of consumers and common household products), but there are other market conditions that contribute too.

Although the Australian dollar has since risen 10% (to USD$0.76), it is rumoured by many to only see drastically better increases by the end of 2016. What the influence of this might be on expected rising interest rates, remains to be seen.

What contributed to the falling Australian dollar?

There were many factors that contributed to the sharp falls of the Australian dollar over the past couple of months. Australia is a big exporter of commodities and was hit by severely low oil prices. Other commodities, which were also priced in USD$ saw similar exchanges and therefore, impacted the AUD$.

Iron ore played a big role in Australia’s exports, and with countries like China being a huge exports and imports partner, any decreases in their demand impacted the Australian economy and dollar value.

With changes in these markets, and other markets like share-based markets or foreign exchange markets, investors start making preservation-based decisions. If there are heavy blows to the market where investors have huge piles of money, they will shift some of it (or more) to safe, more stable environments. Because investors fear further drops in the Australian economy, they continue to withdraw funds until there is a shift in the overall perspective.

The Reserve Bank of Australia (RBA) have also been holding interest rates steadily low, which has created discrepancies between the Australian and US interest rates. This causes further weakening of the Australian dollar. But, the RBA expects to raise the interest rates earlier than expected, with rises coming around in end 2016 or beginning 2017.

What can Australians expect in the coming months?

Australians aren’t facing an all too clear trajectory when it comes the rise or further fall of the Australian dollar. There might be signs of recovery, but the question is, at the cost of what? Although commodities like iron ore have seen increases in exports, the Chinese economy has increased its credit standing to all new highs far exceeding USD$500 billion because of the extra stimulus.

There will be interest rate revisions in 2016 or early 2017 due signs of surplus in economic activity and Australians can expect general increases in house growth as well. Along with this usually comes the tightening on the credit regulations so that the banks and other financial institutions can strengthen their capital reserves.

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