During the recent credit crunch, the Australian Dollar has served as a repository for traders’ fears. It is a very volatile currency, and its exchange rate is prone to rapid depreciation. The Australian dollar is influenced by many factors, including demand and supply. However, there are some long-term factors that play a larger role in the Australian Dollar’s value than others.
Demand for Australian dollars can be increased if economic growth is strong. For example, if a country is experiencing a surge in commodity exports, there will be an increase in demand for Australian dollars. Demand for Australian dollars is also influenced by foreign capital flows. This is due to the fact that Australian assets pay interest, which makes them more attractive to foreign investors. Australian assets also become less attractive if interest rates are declining. A decrease in demand for Australian dollars can also cause the Australian dollar to depreciate.
The Australian government bond yield has fallen to 2.91 percent at the end of Asia trading on Tuesday. The RBA has lowered its benchmark rate for the second straight month, a move expected by many. Many strategists have predicted that further cuts are coming in July. However, further falls in the RBA’s benchmark rate could lead to a weakening of the Australian dollar.
Australia’s economy has benefited from strong demand for commodities, as investors look for a good return. However, growth outside Australia is slower than originally anticipated, and the Reserve Bank of Australia (RBA) is weighing the possibility of slowing growth in the economy. The RBA will also be considering whether further rate cuts are needed to control inflation.
Buying Australian dollars helps Australian exporters to get paid. The price of exports is also influenced by commodity prices. Higher commodity export prices will require more Australian dollars to buy the same amount of commodity exports. Alternatively, if commodity prices fall, exporters may decide to expand their production capacity. The Australian dollar can move closely with changes in risk sentiment, speculation, and supply.
Australia is known for its iron ore exports, and iron ore typically leads to higher export prices. However, Australia’s iron ore exports are down -6% compared to the five-year average. In the calendar year to November, Australian iron ore exports were at their lowest level in seven years. This could mean that China’s steel market is experiencing excess capacity.
Australia’s net international investment position is roughly 58 percent of its GDP. However, Morgan Stanley calculated that the Australian dollar is overvalued by about 20%. This is because Australia’s government bond yield is high compared to other AAA government debt. According to the firm, the Australian dollar’s overvaluation is also caused by weak purchasing power parity, a phenomenon that states that goods and services from Australia are expensive compared to other economies.
Demand for Australian dollars will also be affected by the country’s exposure to a global commodity boom. In particular, China’s economic slowdown could impact Australia’s iron ore export sector. Iron ore is also vulnerable to concerns over pollution. Similarly, Australia’s coal exports could be affected by the growth of shale gas.