Expect the Australian dollar to weaken further

Investors who have interests in offshore securities or travel overseas need to be aware of trends in the Australian dollar (AUD). The value of the AUD is affected by a variety of factors.  The more important of these are interest rates, commodity prices, the strength of the United States dollar (USD) and the Chinese economy. But other factors include national growth numbers, consumer and business confidence, labour and housing markets, the equity and bond markets and inflation figures, all of which contribute to the valuation of the AUD.

It can be seen from the monthly chart of the AUD below, that the AUD has fallen significantly from its high of $1.10 against the USD. At its current value of 71 cents it is now at about its long-term average so there is considerable room for further falls when one considers that most of the factors that affect the value of the AUD are likely to deteriorate in the coming year.

In the European Union, there is some instability and the potential for an economic crisis emanating from Italian banks. The AUD is valued in terms of the USD, so movements in the USD index are very important. With continued weak global economic growth and instability there will be a continuing flow of capital to the perceived safety of the United States.  This will increase the value of the USD index, slow growth in the United States and put more pressure on the AUD.

As well, there are several other influences which together argue for a much weaker AUD. These include the apparent weakening of the Chinese economy. If this continues we can expect falling prices and demand for mineral resources, particularly iron ore which is Australia’s largest export earner. As long as China continues to stimulate its economy, there will be growth and continued imports from Australia. But if the Chinese economy does slow significantly then we should expect the price of mineral commodities to fall and the AUD will fall too. In the new year, the Trump factor poses a threat to international trade agreements which will further exacerbate the effects of protectionism. This will not be positive for the Chinese economy or the AUD.

When these factors are considered, the AUD is likely to weaken further in the coming year and from the chart above, a fall to at least 60 cents might be expected.

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