What Will Happen to The Australian Dollar

Exchange Rate in 2013?

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Peter Lavelle, 03.01.2013

With 2013 ahead of us, what I'd like to do in this post is take a brief look at how the Australian dollar will perform this year.

In my opinion, continued Aussie dollar strength is more likely than not.

But that's just my opinion. Please feel free to comment and share your views in the comments box below.

In 2012, the Australian dollar held firm, in spite of the Reserve Bank of Australia cutting interest rates 1.75% to just 3.00% (a level not seen since the financial crash), and Australia registering trade deficits for the first time in years. Normally, such events would send a currency tumbling. Yet the Aussie held steady, ending 2012 at 1.05 against the US dollar.

So, the Aussie begins 2013 in a stronger position than many thought possible. The question is, will this trend continue throughout this year?

A Strong Australian Dollar is Probable in 2013

In my opinion, it's more likely than not that the Australian dollar will maintain its value throughout this year. This is because the virtues that kept the Australian dollar strong last year are still in place today.

High interest rates, by international standards

For instance, it's true that the RBA has cut interest rates substantially, and that we'd normally expect this to send a currency down. Yet at 3.00%, Australian interest rates are still far higher than almost anywhere in the developed world (in the UK, US and Eurozone, they're close to 0.0%.) That makes Australian investments attractive nonetheless, holding up the value of the Australian dollar.

Impeccable credit rating

In addition, Australia is but one of seven countries on the planet to have a stable AAA credit rating from all three credit rating agencies. In a world filled with uncertainty, this makes Australian bonds deeply attractive as a source of stability. That means demand for them is high, which also keeps the Aussie elevated.

Chinese economic recovery

Furthermore, most economists expect growth in Australia's biggest trade partner, China, will pick up in 2013. That means the price of commodities, such as iron ore and coal, on which Australia depends will rise again. That, in turn, would improve Australia's economic prospects, making buying the Aussie dollar attractive.

For these reasons then, I think the Australian dollar will remain strong in 2013. After all, there's very little that could send Australia economy down to the lows currently being endured in the UK and Eurozone, meaning Australia always looks attractive by comparison.

However, There Are Threats to the Aussie's Strength

However, just because I think the Aussie will hold firm this year, does not mean there aren't things that could put the currency under pressure. These include the following:

The US debt ceiling

The US has to negotiate raising its debt ceiling this year. The last time this happened, in 2011, America came close to defaulting, as the government quite simply didn't have the money to pay its debts. Even after a last-minute deal was reached, Standard & Poor's cut its US credit rating to AA+. If that happens again this year, it could cause significant nail biting, and a weaker Aussie.

Australia's general election

Australia will hold a general election in October. At the moment, polls see Julia Gillard's Labour losing out to Tony Abbott's coalition. If Mr. Abbott wins, he might seek to reverse Ms. Gillard's carbon and mining taxes, resulting in a big change in Australia's fiscal landscape. The large impact of these changes, and the uncertainty surrounding the election, could hence send the Aussie down.

A floating yuan

It's not likely, but there's an outside chance China will float the yuan in 2013. What this would mean is, investors would be much freer to invest in the Chinese currency, meaning there's less demand for the Aussie, which is currently used as a proxy. If that happens, the value of the Australia dollar would fall.

However, for all that, it's equally possible that none of these things will impact the Australian dollar. And for me at least, neither of them change the fact that the Australian dollar is likely to remain strong this year.

Do you think I've got it wrong? What do you predict for the Australian dollar this year? Let us know your thoughts in the comments.

Get in Touch

So a firm Australian dollar is on the cards in 2013. To find out how that will affect your currency transfers, feel free to enter your query into the form below. I'd be delighted to give you an in-depth response.