Party Over for the Aussie
Welcome back members. We hope everyone had a safe and happy festive
season. As we prepare to tackle 2014 with renewed vigour, we thought we’d
dedicate the first editorial of the year to the Aussie dollar.
After defying gravity for around two years, the local unit appears
to have finally buckled under the pressure of a weaker economy, falling
commodity prices and interest rates, as well as renewed US dollar strength.
Today we will look at these reasons behind the Aussie dollar’s fall
from grace and assess the potential for further currency depreciation.
By and large, 2013 was a year of transition for the Aussie economy.
The nation’s GDP growth slowed in the past year and a half as the mining boom
faded in response to a moderating Chinese economy.
Capital expenditure in the resources industry has diminished and the
economy is presently in a tough spot as policy-makers try to lift growth in
other industries to compensate for weaker mining activity.
Lower spending on mining projects and subdued manufacturing growth
in the eastern states have been the principal causes of the rise in Australia’s
Lower prices for our commodities and weaker exports to Australia’s
major trading partners – other than China – have also led to near continual
monthly trade deficits.
Below we graph the trend in Australia’s trade balance (red bars at
bottom of chart), the unemployment rate (yellow line) and the Aussie dollar
As we can see, from January to October there have been consistent
monthly trade deficits at a time when the unemployment rate has shot up from
5.4% in January to 5.8% in November.
Lower commodity prices and
Although there was a big rally on global equity markets last year,
commodity prices in general headed in the opposite direction.
The Thomson Reuters/Jefferies CRB Commodity Index (CRB) shed around
4% in 2013 as commodity demand, particularly from emerging economies, failed to
keep up with expanding supply.
Also, let’s not forget the huge plunge in the price of precious
metals like gold and silver.
Australia is a major commodity producing nation, and the lower
prices received for our mineral exports was a key reason behind the monthly
trade deficits in 2013.
Also the RBA implemented two interest rate cuts in 2013, with the
official cash rate currently at a record low 2.5%.
Not only have interest rates fallen but RBA governor, Glenn Stevens,
has made known his displeasure at the high Aussie dollar, believing fair value for
the local unit is around 85 US cents.
His comments about the Aussie dollar have been interpreted as a sign
that the central bank is not done cutting interest rates.
The downward trend in both the CRB Index (white line) and the RBA official
cash rate (green line) is illustrated below.