At the August 2023 meeting of the Reserve Bank of Australia (RBA), the board decided to keep interest rates on hold. As a result of that news, the Australian dollar fell.
The price of the Australian dollar is determined by demand and supply. Price goes down when the demand is low and price goes up when demand goes up. In this article we discuss is causing the AUD to continue falling.
Interest Rates
The US cash rate is 5.5% and Australian interest rates are only 4.10% at the moment.
Currency investors will consider the country with the highest interest rates as the better option to invest in. With the interest differential between the Australian and US market, the higher interest rates in the US will drive up demand for US dollars, and therefore less demand for Australian dollars.
Commodities Prices
Australia is a big exporter of commodities, so when these prices fall, the income generated from this sector decreases the total income flowing into the Australian economy. This can decrease foreign capital inflows which can cause the Australian dollar to fall. When commodity demand increases, so does the flow of foreign capital. Importers purchasing Australian commodities need to convert foreign currency into Australian dollars. So, a decrease in demand for commodities will lead to a lower AUD.
China’s economy
Australian’s largest trading partner is China as we export 29.2% of total Australian exports to this country. Therefore, the Australian currency is significantly impacted by the economy in China. When manufacturing activity is lower, then demand for commodities will be lower. A decrease of demand of commodities will lower the AUD currency.
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US dollar as a safe haven
The US dollar is considered a safe haven during tumultuous economic times so the popularity of the dollar is increased during these periods.
US treasury bonds are considered a safe investment as they have never defaulted on payments to investors. Hence these instruments are considered safe havens during uncertain times. As the demand for US bonds increases so does the US currency rate. Investors need to pay for these US bonds in USD so they need to sell out of their foreign currency and pay in USD dollars and this drives the US dollar value up.
Lauren Hua is a private client adviser at Fairmont Equities.
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