Australian Dollar Trending Lower in 2013 To Date

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Peter Lavelle - economics writer

The Australian dollar has fallen to multi-month lows against the euro and US dollar so far this year. Furthermore, it's set to continue falling, though not to levels that were considered "normal" before the financial crash.

Peter Lavelle, 07.02.2013

Five weeks into the new year, and we're beginning to get a sense of how the Australian dollar will perform in 2013. The answer is: it will weaken, as Australia's economy softens, and the outlook in the Eurozone in particular improves.

For instance, at present the Aussie dollar is at a three-month low against the US dollar of 1.0327, as downbeat Australian data dampens investors' spirits. Retail sales fell -0.2% in December in Australia among other things, while last month the number of full-time jobs fell 9,800.

Against the euro meanwhile, the Aussie is at 0.7633 today, its lowest point since December 6th 2011, or fourteen months. This is chiefly because this year has so far seen an astonishing revival of confidence in the Eurozone, as the euro no longer looks set to collapse.

Really, it's only against the UK pound that the Australian dollar is holding up. The Aussie is currently at 0.6593 against the pound, not too far off multi-year highs. This reflects the fact that the UK is widely expected to fall into its third recession since the financial crash (the dreaded triple dip) this year.

The Aussie is Down, but Hardly Out

So, the Aussie is finding itself in dire straits against its two biggest counterparts in 2013. I think it's important to qualify this statement though, before I give you the impression the Aussie is going to spend the rest of this year diving like a lead balloon.

Yes, the Aussie is weakening, and at multi-month lows against the euro and US dollar. In spite of this however, I don't think it's the case that we're going to see the Australian dollar fall to its pre-financial crisis levels (that is, AU $0.75 or so against the US dollar, compared to the AU $1.03 it's at now.) This is because we've truly seen a fundamental shift in the Australian dollar global status, as a result of the crash.

Before the crash, the Australian dollar was a second-tier currency, whose value chiefly reflected the price of commodities such as gold and iron ore. It made up a negligible part of global foreign exchange trades.

High Australian dollar: the new normal

Today however, largely because of Australia's close ties with China, and the fact that Australia was the only industrialised nation to avoid recession, it's arguably a top-tier currency, and a greatly attractive one at that. This is reflected in the fact that it's so rapidly gained value since 2008.

Hence, yes, the Australian dollar might weaken, as the local economy falters, and investors return to the euro. But is the Aussie going to topple to pre-financial crisis levels? Likely not.

These sentiments were echoed this week by the chief executive at Qantas (Australia's oldest and largest airline), Alan Joyce. Speaking at the Tourism and Transport Forum in Sydney on Wednesday February 5th, Joyce told delegates that the high Australian dollar was the new normal, and that "Any business looking at the economics of their operation has to be planning that it is not going to change."

Will the Aussie Continue to Lose Value?

So, the Aussie is a much stronger currency than it used to be. Given this new reality, where can we expect the Australian dollar to head next?

Well, I think we can look for continued Aussie weakness, especially against the euro and US dollar.

Australian dollar VS euro

For the euro's part, I think it's only going to get stronger, as increasing numbers of investors decide the debt crisis is past, and it's now safe to return to the currency. Indeed, prior to the debt crisis, the euro was considered a rival to the US dollar as the world's reserve currency. Given that, it likely has a long way to climb.

Australian dollar VS US dollar

Against the US dollar meanwhile, I think weak domestic data out of Australia will continue to pull the Aussie down. As I mention, both retail sales and full-time employment fell in Australia, according to the latest figures. This reflects the fact that, sans the mining boom, Australia really lacks an alternative avenue for growth. If that becomes more apparent in the coming months, it will drag down both Australia's economy and the local dollar.

Australian dollar VS the pound

Lastly, I think the Aussie's prospects against UK sterling are pretty good, if only because the UK right now is in such poor shape. If Britain falls into a third recession, as is widely forecast, there'll be a broad sell-off of the pound, not just against the Australian dollar, but every currency going. We'll learn the UK's fate in March.

In short then, Australian dollar weakness is on the cards for this year - just not so much that the Aussie sinks to pre-financial crisis levels.

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