(Please note due to issues with the data dashboard we are not able to provide a direct link to the graphs used in this article. However most of these graphs can be accessed through the FWPA data dashboard).
Always one of the world’s most traded currencies, the Australian dollar has ridden the pandemic like a bucking bronco. The early days of panic saw the Australian dollar sold off in the global rush to the US dollar ‘safe house’, before commencing what to the end of August was a stunning recovery. The data is clear, but what is not as clear is why the Australian dollar has moved well past fair value with the US dollar in recent months.
At the end of 2019 (eight short months and one lonnnggg pandemic ago), the Australian dollar was hovering around the USD0.7000 level. Though it had been tracking down for the two prior years, it was broadly considered that USD0.7000 was ‘about right’. The economist’s euphemism is ‘fair value’.
This can be seen in the chart below.
The Australian dollar tracked down quite steeply, against the US dollar and by proxy, against the Euro and Yen at the same time. By the end of March, the Australian dollar was at USD0.6175, having lost 12% of its value in just three months. Keep in mind that mid-March, the rate was as low as USD0.5500!
And then, just as fast, the Australian dollar turned the corner and by the end of August was almost 20% higher at USD0.7354. Astounding movement in difficult times. But what caused the rise, given the Aussie found itself well above the perceived ‘fair value’?
One factor has no relationship to the US at all, at least directly. Australia’s raw resource exports – coal and iron ore in particular – have been very strong and have operated at excellent prices. This came about as the Chinese economy recovered very quickly and recommenced supplying the planet with a variety of goods. As has long been the case, Australia’s economic health is closely tied to the main customer.
A second factor is that the US economy is not doing particularly well and currency markets appear to have factored in a discount for the US dollar as a result. That played the Australian dollar up for a time.
So much was this the case that a concerned RBA conceded a high Australian dollar was not helping position the Australian economy for its recovery. In fact, some bank economists suggested that a year-end USD0.8000 was not out of the question! Aside from anything else, the roller coaster of that outcome would be astounding for a single year.
But more importantly, the minutes of the RBA Board meeting in September included what was widely considered to be ‘jawboning’ as the RBA tried to talk the market down. The domestic economy, including the export markets, could simply not sustain such an overweight local currency.
We could come at this a number of ways, but though they are at historic lows, a ‘half a cut’ of the Australian Cash Rate from 0.25% to say 0.10% has been suggested for October. Perhaps, but will that really make a difference to the exchange rate? On face value, it doesn’t seem likely.
