Is The Australian Dollar About To Crash On The Foreign Exchange Market?

Is the Australian dollar about to crash on the foreign exchange market? These are the rumours that are circulating at present, as the AUD seems to run out of steam following months of astonishing gains against both the pound and euro. In the past fortnight for instance, instead of continuing the steady climb that has characterised the Australian since the financial crash in 2008, it has merely held its ground against its rivals. This suggests that change is a-coming. But what is causing this sudden loss of momentum in the AUD, and what might happen in the future?

 

China and Foreign Exchange Ch-ch-changes

 

One reason the Australian dollar is starting to resemble a steam train without coal is a recent slowdown in Chinese economic growth.

 

In recent years, China has fuelled massive gains in the Australian mining industry (sending the AUD through the ceiling) as it expands its manufacturing base and Chinese living standards rapidly improve. But in recent months, Europe (China’s biggest export market) has entered recession, killing demand for Chinese products and hence reducing Chinese manufacturing output. This, in turn, has slowed the incredible gains in Australian mining (and stopped the AUD in its tracks.) Of course, China is still expanding at a rate most industrialised countries would drool over (around 7.0%-8.0%.) So it is hardly as though demand for Australian commodities is about to dry up. But the pace looks set to be more modest.

 

Two-Speed Australia

 

The AUD has also come under pressure because of increasing concerns that Australia is developing a two-speed economy.

 

On the one hand it is true that expanding mining has shielded Australia from the global economic crisis: it avoided recession in 2008 unlike most industrialised nations for instance. But on the other hand, sectors including manufacturing and retail have come under increasing pressure as the dollar rises, causing thousands of people to lose their jobs. This has created an attitude of caution among consumers, leading to disappointing retail sales and the impression that, mining aside, Australia is little better off than developed economies in Europe or the US.

 

What Comes Up…

 

Last of all there is the simple fact that, even in foreign exchange, things must obey the laws of the markets.

 

According to indexes including The Economist Big Mac index (measuring the relative worth of currencies according to the price of a Big Mac) the Australian dollar is overvalued up to 40.0% at present, as investors seek secure locations for their cash. In short, this momentum just cannot continue. Eventually, the exorbitant price of the AUD is likely to overshadow its attractions, prompting demand and then value to decline. Supply and demand at its best!

 

This guest post was contributed by Michael Smith at foreign exchange specialists Pure FX.

 

18 thoughts on “Is The Australian Dollar About To Crash On The Foreign Exchange Market?

  1. It really amazes me how all of our world currencies are intertwined and how one country can influence the value of another countries currency. But when you dig deeper, you can see the connections, just like you highlighted in your article. Thanks for the insights.

  2. Foreign exchange market nowadays are really not good since US had experienced global crisis. but I do hope that Australian dollar won’t.. Thank you for sharing this! 🙂

  3. We can’t never tell what comes next, but I am confidence enough that our society wont put down because of the rate at Global market… Even though a one place can experience a crisis its not be a reason that it will subsides to down….

  4. This is pretty alarming. I have some friends who live in Australia. How worse can this crisis go? I hope it won’t hurt very much. Thanks for the information.

    -Eleonora

  5. Why is that when big countries are suffering from economic crises, it affects the small country like Australia? This rumor can also affect the other countries who are engaging business with Australia. If this happens, residence of Australia will suffer from high cost of commodities.

  6. Interesting. I think since the economic crisis has taken world-wide dimensions, surely Australia would be influenced too, sooner or later. Thanks for sharing 🙂

  7. How I wish it won’t get longer, I know that crisis is alarming on the part of all but leaders are their to do something and made a solution from it…

  8. The world economy is so interlinked that any one country crashing can affect the entire world. Greece is a prime example of that. The bright spot is that Australia is not as interlinked to other countries as Greece ala the euro. But it would still have a worldwide effect.

  9. Every country experience a kind of crisis in which our government trying to do a solution for it, I know that it will affect the business status for a mean time but its still work into and cope up more than it provides…

  10. I hope so! 🙂 I’ve been wanting to travel to Australia for a while but it’s sooo expensive. I’ve heard that the average house price there is about $500k which is insane. Like you mentioned, I think they will take a hit as China slows down more.

  11. I think the people living in Australia should be aware with this and I am sure they will get alarmed when they know about the foreign exchange market…

  12. Dollar crashing down is really a bad sign. People will try to withdraw their money and change it to something else quickly before it becomes worthless. Unemployment could rise dramatically as manufacturers find it impossible to purchase needed parts from other parts of the world, There would be Food scarcity and Public riots too. Hope it will not crash down.

  13. The Aussie Dollar has been one of the most volatile currencies in the FX markets. The reasons mentioned about China are good ones. The other big factor is the interest rate differentials between the Aussie markets, with interest rates close to 5% and most other world markets (US, Europe, Japan) at rates close to nil. I think if we see interest rates rise in developing economies the Aussie Dollar could take a hit.

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