The Australian Dollar has remained stubbornly strong for the past 15 months, however conditions look set for that run to come to an end. Here we outline three key variables that look set to drive the Australian Dollar down, particularly against the US Dollar.
1. Commodity Prices
The Australian Dollar is a commodity-based currency, which simply means that the currency tends to be stronger when commodity prices are high. Commodities had a record run in 2016, however this has reversed quickly with the iron ore price dropping substantially over recent weeks to below $60. With coal prices also declining this factor certainly looks likely to drive the dollar lower.
2. Long Positions
Currently, the majority of positions on the Australian Dollar are long, meaning that most expect the dollar to remain strong and even appreciate further. As can be seen from the chart below, positions have shifted from being short in early 2016 to long recently. Given this current position, it means that the Australian dollar will be sensitive to any rises in the US dollar and further declines in commodity prices.
3. Interest Rates in the US
Finally, it’s important to understand that interest rate differentials between countries will impact currency movements. To illustrate, as US interest rates rise and gradually close the gap between the US and Australia’s rates, this will likely lead to a further decline in the Australian dollar. This is also illustrated in the following chart:
It’s important to review your own investments and position yourself appropriately. Having some exposure to foreign currencies may prove to be a sound strategy if the outlook for a declining Australian dollar comes to fruition.
To your financial success!
Jarrad Brown is an Australian-trained and qualified Fee-Based Financial Planner with Australian Expatriate Group, division of Global Financial Consultants Pte Ltd providing specialist financial advice and portfolio management services to international and local professionals in Singapore. Jarrad Brown is an Authorised Representative of Global Financial Consultants Pte Ltd – No: 200305462G | MAS License No: FA100035-3
Australian Expatriate Group is licensed by Global Financial Consultants in Singapore, with a team of Australian-trained, experienced and qualified, allowing us to provide specialist advice to Australians living abroad.
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General Information Only: The information on this site is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision.