AUD in strong recovery
In the last 12 months, the AUD has traded in a wide range, from above USD0.7500 to below USD0.6250. But since bottoming in late October 2022, it has been on a tear, trading briefly at USD0.7000 yesterday. Much of this volatility reflects the strength or weakness of the US dollar, which remains the investment world’s “safe haven”. When panic or nervousness hits markets, investors flock to the USD, and when risk appetites return, the USD tends to weaken.
The AUD does have its own push and pull factors, however. It is historically the fifth most traded currency in the world; investors view the AUD as a proxy for world growth – consistent with Australia being highly leveraged to economic growth through its exports of industrial and precious metals, energy and agricultural commodities. While some commentators are still talking about slowing world growth and a third of the world being in recession this year (the IMF), that’s news markets were reflecting months ago. Markets are thinking about a strong return to growth in China post zero-COVID, and the proximity of peak interest rates now that inflation appears to have peaked in the US. Both those factors, together with a weakening USD, are bullish for the AUD.
The fall in the AUD over the last year was not a reflection of our national accounts (our credit rating remains unchallenged at AAA), and nor is it a reflection of our terms of trade, which are exceptionally strong. Indeed, our economy looks good compared to most others. Over the long term, the AUD has averaged around USD0.7500, and it appears to be heading back to that region.
AUD over last month
Source: Trading Economics
The implications for investment markets of a stronger AUD are many and varied, but would include restraining our export earnings, cheaper imports, and lower inflationary pressures from import costs. Market analysts will have to recalibrate their earnings forecasts for companies based on their currency exposures. But if the “growth narrative” is correct, the AUD could surprise on the upside.
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