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Australian dollar takes heavy hit

In what continues to be a moving feast, the Australian dollar collapsed in February and March, with the month-end exchange rates at two-decade lows. Declines in many global currencies are expected right now, as capital rushes to the usual safe-haven of US dollars. However, as the details show, the Australian dollar has charted declines against most of its major trading partners.

At the end of March, the Australian dollar was trading at USD0.5931, down 9.1% compared with February and 15.3% lower compared with the end of December 2019. The situation was similar for the Yen (down 7.6% on February and 13.8% on December) and the Euro (down 8.4% on February and 13.1% on December).

As the chart below shows, the Australian dollar has not plumbed these depths any time in the last decade. In fact, the last time the Aussie was below USD0.6000 was in 2003.

1

Fig. 1

To go straight to the dashboard and take a closer look at the data, click here.

Since hitting those lows, the Australian dollar has bounced around at something close to USD0.6000, moving in line with other currencies for the most part. The emphasis on the nominal safe haven of US dollars was always going to see countries like Australia – with one of the most heavily traded currencies in the world – experience a flight of capital. When emergency interest rate cuts were introduced, that flight of capital accelerated.

It may have escaped notice in all of the news of late, but Australia’s Cash Rate was shifted to an historic low of 0.25% on 20th March, having been reduced just a fortnight earlier to 0.50%.

This is all pretty much orthodox expectation on the US dollar front, especially combined with the essentially zero interest rate (0.25% covers transaction costs and little more). What is less common and requires a moment’s thought is the sharp depreciation of the Australian dollar against other major currencies, especially the Yen and Euro.

The second chart shows the same data, but indexes it from the beginning of 2018.

1a

 This chart shows that by and large, the Australian dollar tracks the US dollar and the Japanese Yen on a consistent basis, and most recently, at an almost absolute level. Despite the trajectories being similar, the journey has been different against the Euro throughout 2018 and 2019, only falling in line with the US dollar under the current COVID-19 pressures.

The consistent declines in 2020 appear to be a function of consistent thinking about the value of the Australian dollar. That seems a little obvious to say, but the perceptions were clearly different until the end of 2019.

It is difficult to pin down exactly why there is such consistency, but one clue may be the number of transactions that are being written in US dollars, that were previously written in Euro.

In any event, some form of benchmark appears to have settled under the Australian dollar at around the USD0.6000 rate. That will last only as long as there is not significant new economic information or further rate changes. On that front, it is hard to see how there could be any more significant economic news and central banks have very little in the way of interest rate movements left with which to play.

In short, there is no reasonable way to provide a currency outlook for tomorrow, let alone the end of the month.

Posted Date: April 6, 2020

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