Trade spats, worries about China’s economic growth and domestic concerns remain bearish headwinds for the Australian dollar, which has been one of the worst performing developed market currencies of 2018. And the tide is unlikely to turn soon, analysts say.
In the year so far, the antipodean currency AUDUSD, -0.2390% has dropped more than 9% against its U.S. rival, according to FactSet, beaten only by the weaker Swedish krona USDSEK, -0.1400% On Tuesday, the Aussie touched its lowest level since early February 2016, falling to a session low of $0.7085.
“Despite the reassurances of the central bank it appears that the Australian dollar does not currently have the gumption to fight either broad-based dollar strength or fears that the domestic economy could be exposed to cold headwinds blowing in from China,” said Jane Foley, senior FX strategist at Rabobank.
The Reserve Bank of Australia, which last met on Tuesday and left its key interest rates unchanged, previously said that depreciation in the Aussie dollar could be beneficial to the economy.
“On the one hand, the RBA has a long way to go before considering pushing the hiking button, while on the other, the Federal Reserve is expected to hike two more times this year,” wrote Charalambos Pissouros, senior market analyst at JFD Brokers. Global rates differentials have helped spurring on a dollar rally that had driven the popular ICE U.S. Dollar Index DXY, +0.05% to 14-month highs in July.
But emerging market sentiment suffered over the summer—especially in the Asia Pacific region—on the back of worries about trade relations and rising interest rates in the U.S. that weighed on global liquidity. And Australia, with an economy and currency linked to global trade, suffered the consequences as well. And in common with suffering emerging-market countries, which have been battered throughout the summer, Australia also sports a high current-account deficit, which can also make it more susceptible to negative moods in the market.
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The emerging-market shock waves also reminded investors to worry about a possible growth slowdown in China, which would hit Australia dearly.
The Australian dollar is often considered a developed market proxy for China’s yuan USDCNY, +0.2494% USDCNH, +0.1892% due to Australia’s tight trade ties with Beijing, particularly when it comes to Australian iron ore exports. Australia is home to vast iron ore reserves, which will be in high demand from Asia for as long as the infrastructure and construction boom continues.
Rabobank
Some of Australia’s economic worries are also domestic. A slowdown in the housing market has pointed to risks in high household debt levels, Foley said, and the correction in house prices may weigh on consumer confidence. Wage growth has also been stubbornly low.
“High household debt levels will now increase the sensitivity of consumer to any interest rate hike or to any loosening in the labor market,” Foley pointed out. This perpetuates the cautious tone of the RBA.
All these risks may explain why the Aussie dollar was so quick to shrug off the positive news of the country’s second quarter gross domestic product report, which beat expectations. Australia’s economy expanded 3.4% in the 12 months ending in June, versus the consensus forecast of 2.8%. However, the RBA dampened the excitement some and said after its Tuesday meeting that the first half of 2018 is expected to grow above average and that GDP growth for the full year was just slightly above 3%.
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