Is the Australian Dollar Forecast to Climb?

Peter Lavelle - 23.06.2012

I'd like to address the question: Is the Australian dollar forecast to climb?

The short answer to this question is:

No one knows what's going to happen with the exchange rate. If I knew that, I wouldn't be writing about it on the internet. I'd be living a life of unparalleled luxury having made millions trading currencies.

Anyone who tells you otherwise is perhaps not so trustworthy.

However, just because we're not able to say with 100% certainty, 'The Australian dollar will do this at this time on this day,' doesn't mean we can't make educated guesses, based on what's happened in the past and what's happening in the world.

To answer this question then, we need to look at 3 things:

  1. What's happened to the Australian dollar exchange rate since 2008.
  2. What's happening in the Australian economy today, and how that affects the exchange rate.
  3. How what's happening in the rest of the world, and in particular Europe, affects the Australian dollar.

Here we go.

What's Happened to the Australian Dollar Exchange Rate Since 2008

Since 2008 and the financial crash, the Australian dollar has strengthened massively against most major currencies. For instance:

  • AUD to USD: 55.05% rise.
  • AUD to GBP: 81.65% rise.
  • AUD to EUR: 67.39% rise.

This is because, while most major economies spent 2008-9 mired in recession, Australia avoided this. The emu dollar hence became hugely attractive to investors looking for economies that continued to expand.

What does that mean for you?

Unfortunately it means that, if you're planning to emigrate to Australia, your pounds or US dollars aren't worth so much today as half a decade ago.

On the other hand, if you're an expat already in Australia, and need to sell some Australian dollars into other currencies, you're doing better than ever right now. So it depends a lot on your circumstances.

What's Happening in Australia Today?

Of course, just because the Australian dollar has gained since 2008, doesn't mean that's what's happening today. Instead, the future fortunes of the AUD have a lot to do with Australia's economic prospects. So what are they?

  1. Australia has benefited hugely from Chinese demand for its commodities since 2008, such as coal and iron.

    This looks set to continue for the foreseeable future, giving Australia an enviable source of growth. However, a recent economic slowdown in China could offset this, and prevent the Australian dollar gaining.

  2. There are concerns that Australia has developed a two-speed economy.

    Aside from mining, retail and manufacturing have ground to a halt (as with elsewhere in the developed world.) If these weaknesses are seen to outweigh Australia's strengths, that could hurt the Australian dollar.

What's Happening Elsewhere in the World?

So Australia has an enviable buffer in the form of China, protecting it from the worst of the global downturn. But that doesn't mean Australia is disconnected from the world economy, and events elsewhere are likely to affect the Australia dollar. What's going to happen?

The Australia dollar has already benefited hugely from the Eurozone debt crisis, as the markets abandon the euro in favour of healthier economies.

That's part of the reason the AUD has gained so much. But equally, Australia is a small economy of just 23 million people, compared to the Eurozone's 350 million, meaning the Australian dollar cannot be expected to climb forever. If the Eurozone crisis continues to wage, that could begin to work against AUD strength.

So Is the Australian Dollar Forecast to Climb or Not?

In short then, as I mentioned at the beginning of this article, it's difficult to say for certain what will happen to the Australian dollar.

For me, we've certainly seen a slowdown in its climb in 2012 so far, as China's economic progress declines, and the dollar hits its new post-2008 equilibrium. But that doesn't mean the AUD won't continue to climb, especially if Australia continues to prove resilient to the global downturn.

Yours kindly,

Peter

Pure FX

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