Aussie dollar shunted by US weakness and global tensions

After more than a year of relative stability for the Australian Dollar’s exchange rate, July and August have seen the currency appreciate against the US Dollar, as global tensions rise and the US economy operates to its somewhat erratic national leadership. As a result, at the end of July, the Australian Dollar had risen 3.84% against the US Dollar to trade at USD0.7987, and on 29th August, was only 61 basis points lower at USD0.7926.

The chart below shows the Australian Dollar against the US Dollar, the Japanese Yen and the Euro.


To go straight to the dashboard and take a closer look at the data, click here.

Recent movements in the Australian Dollar have seen its US Dollar exchange rate operate almost in concert with the Japanese Yen exchange rate. This reflects a couple of realities. First, a fair proportion of Australia’s trade with Japan is denominated in US Dollars, and secondly, both Japan and Australia have a close commercial relationship with the US, and rely upon its currency for the direction of their own.

The situation is somewhat different for the Euro, against which the Australian Dollar appreciated only modestly (up 1.0%) in July and declining 1.1% in August, to the 29th. This has occurred mainly because the Euro has also appreciated against the US Dollar, as the US economy has been unable to shake itself free of its constraints.

It had seemed that USD0.70 or just above, that the Australian Dollar was operating at a fair and reasonable value. Despite it’s habitually being traded in a range of plus and minus 20% from its mid-point in any one year, its stability through the period from the beginning of 2016 to more recently, seemed a settled place in which businesses could operate.

Commentators and analysts expect to see the Australian Dollar ride higher against the US Dollar for the short to medium term, if only because there are few expectations of the US economic agenda providing increased clarity.

President Trump’s program of fiscal stimulus (through both fiscal and monetary policy) has been stymied by his inability prosecute his agenda in the legislature. The expected strength in the US Dollar that would have come from stimulus has not been realised. That has left the US Dollar vulnerable to downsides – like posturing seemingly towards conflict with North Korea – resulting in the currency’s depreciation and causing dependent currencies like the Australian Dollar and the Japanese Yen to rise.

Look to the mid-term at least for any of the desirable depreciation of the Australian Dollar to be realised.