Is the Australian dollar rising from the ashes?

The Australian dollar has been in the corner where the blows fall for years. At the end of 2019, the currency hit its lowest level in more than a decade. Only to fall even further due to the large forest fires and the corona virus. When does the bottom come into view?

Just when the Australian dollar seemed to be entering calmer waters, the flames went up. Literally, unfortunately. Massive wildfires have reduced approximately 10 million hectares of forest to ashes in recent months. That ecological disaster cost an enormous amount of animals and more than twenty people. Damages are in the billions of dollars, according to credit rating agency Moody's.

Tourism is taking a serious hit and domestic consumers are more limited by the uncertainty. A few weeks ago, the Australian economy suffered another setback. The coronavirus is causing a significant slowdown in China's growth. That country is by far Australia's most important trading partner.

Clap on clap on clap
The Australian dollar is taking a beating on currency markets. Since the turn of the year, the currency has fallen by more than 4% against the US dollar. This decline comes after a decline of more than 10% in the past two years. The aussie – as the currency is also known – has hit its lowest level since early 2009.

For a while it even looked like the decline was accelerating. Many economists had already made an advance on another rate cut. However, the central bank in Sydney chose not to tinker with interest rates earlier this month. A striking choice, because an interest rate cut was an excellent opportunity to give the Australian economy some relief.

Inflation to dream of
In recent years, the Reserve Bank of Australia (RBA) has seized that opportunity all too often. Since the end of 2011, the interest rate has been reduced in more than ten steps from almost 5% to less than 1%. Inflation is now just below 2%. That is a level at which ECB President Christine Lagarde would, so to speak, kill for.

In Australia, however, the inflation target is slightly higher: between 2% and 3%. For the time being, however, the RBA is focusing more on the strong labor market than on the negative impact of the forest fires and the corona virus when formulating its interest rate policy.

Waiting for the inevitable
The question is how long the central bank will stick to that strategy. The slowdown in China in particular will hit the Australian economy considerably. For example, since the turn of the year, the price of iron ore has fallen by 10%. The country ships about $60 billion of this raw material to China every year.

In addition, there are far fewer tourists to Australia in the first months of this year. The series of 28 years without recessions will probably not be endangered by the setbacks. But it is almost inevitable that the RBA will cut interest rates in the course of 2020 to give the economy a boost. There is a good chance that the Aussie will only really reach the bottom then.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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