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What’s next for the Aussie dollar?

Australian dollar hit by natural disasters, but forecasts look promising

March 2020

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Australia’s economy, infrastructure, population and wildlife are all still reeling from the horrific bushfires that wreaked havoc on the country over the summer. In the short term, things are looking particularly tough for the agriculture and tourism industries.

So, what’s the economic damage? Moody’s Analytics expect the economic damage of the current fires to exceed the A$3 billion seen from the Black Saturday blazes in 2009. GDP could fall by as much as 0.25%-1% which would leave growth for the year almost flat.

With consumer spending falling to its lowest level since the global financial crisis, the Reserve Bank of Australia (RBA) may continue to implement its expansive monetary policy stance and surprise the market with a rate cut in a bid to improve consumer consumption levels. The first RBA meeting to watch out for is on March 3, where according to Bloomberg data, bond traders and economists expect the central bank to keep rates on hold. However, the decision may be altered depending on the impact of the coronavirus. Likewise, a change in the unemployment rate (5.1% in January) will be a consideration for future rate cuts.

External factors weighing on the Australian dollar too

The global economy is now so interlinked that a significant event in one of the major economies filters through to other economies. The ripple effect of the coronavirus has already begun, as the list of big businesses warning investors about the impact of the virus on their operations and supply chains grows by the day.

The outbreak of the coronavirus will impact Australia and New Zealand in particular, as both count China as their largest trading partner and are therefore closely linked to China’s economic performance. China is the biggest buyer of Australian goods with natural commodities such as coal, natural gas, wheat and wool on the list of goods worth more than A$105 billion imported by the country each year.

Exports to China from Australia hit A$13.89m in December1 last year , up on the previous month. But with the effect of coronavirus quarantine measures hitting in January, it is likely these figures will be lower.

Another consideration for the strength of the AUD is that China is looking to reduce its carbon footprint, announcing it plans to ban plastic bags in cities by the end of 2020. Should China continue this trend toward sustainability and move away from natural resources such as coal and natural gas, which it buys from Australia, this could have negative impact on the currency.

1https://tradingeconomics.com/australia/exports-to-china

This is an excerpt from the OFX Currency Outlook. Download the full report for expert commentary on current global events and their potential impact on key currencies including the pound, euro, AU dollar and US dollar.

In October 2020, the drivers of the currency market are likely to be:

  • Overall market risk sentiment. News around the resolution or continued threat of events contributing to economic uncertainty globally, including the Evergrande crisis in China and the US debit ceiling
  • High inflation and low unemployment data, which could create urgency for central banks to increase interest rates
  • Commentary from central banks around how, and when, they might change monetary policy
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Download the OFX Currency Outlook

Learn more in the latest edition of the OFX Currency Outlook. It’s been produced to help you navigate market movements today, and to understand what to watch out for in the coming months.

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