Australian Dollar (AUD) Outlook & Valuations

Did you know that the Aussie dollar consistently ranks amongst the top five most traded currencies? The popularity of the currency is based in part on the 3 G’s. Geology has made Australia rich with natural resources and premium commodities including iron ore, oil, and gold. Geography has given the country a strategic proximity to Asia, and the stable government generally maintains comparatively high interest rates and beneficial trade policies. Most AUD valuations focus on the Aussie dollar as it relates to the U.S. dollar (USD) or New Zealand dollar (NZD).


Please keep in mind that OFX does not provide advice or specific exchange rate forecasts or predictions; however, here are some general considerations you can use when evaluating forecasts and making your own decisions regarding the best time to transfer your money internationally.

Top Factors that Influence AUD Exchange Rates

Due to its major commodity exports, including grains and metals, Australia is one of three primary commodity currencies along with the New Zealand dollar (NZD) and Canadian Dollar (CAD). When attempting to predict the movement of the Aussie dollar, particularly as it relates to the US dollar, investors may take into account these country-specific factors:


  • Farming. About 12% of Aussie GDP is based around farming and value-adding agricultural processes.1 Beef, wheat, wool and cotton are a few of the top ten Australian agricultural products going overseas. Of course, Australia has faced severe historical water shortages, and there is an ongoing political debate regarding the export of live animals overseas. These are factors to keep in mind when reviewing Australian dollar valuations.


  • Mining discoveries, performance and regulations. Oil, gold, iron ore, uranium, nickel and coal are heavily influential on GDP, and the demand for these resources by China and India, in particular, may affect the AUD exchange rate.


  • Economic growth or decline in Asia. According to Commonwealth Bank, “Some 76% of Australia’s exports are direct to Asia, and AUD is often used as a proxy for Asia.”2 Import/export deals, trade agreements and policies can play an influential role on Australian dollar currency movements--especially as these policies relate to relations with China, India and Japan.


  • Reserve Bank of Australia announcements. When trading currencies, the policies of the local reserve banks are always important. In the case of Australia, the RBA announcements factor even more than usual because the Aussie dollar is a popular option for carry trades that originate in Japanese yen.  (Japan usually has low interest rates, and the RBA usually supports relatively high interest rates.) Historically, the interest rate spread between the two currencies can be close to 4%. When reviewing Australian dollar valuations, how such RBA announcements may affect the interest rate spread is another factor to consider.


Like many commodity currencies, the Australian dollar can be volatile. That’s both why it’s popular with traders and why it’s very important to hedge risks when evaluating AUD/USD exchange rates. If you’re ready to make an overseas money transfer, you should know that big banks charge big margins on foreign exchange transactions, often up to 4%. Instead, register with OFX and lock in a great rate.

Sources:

  1. http://www.nff.org.au/farm-facts.html
  2. https://www.commbank.com.au/guidance/economy/what-makes-the-australian-dollar-move--201605.html

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