Exchange rates and a currency’s intrinsic value are essential indicators of a country’s economic state and also impact trades at local and international levels. The Australian Dollar (AUD), one of the most traded currencies in the global currency market, has a rich history of influencing Australia’s trade with other countries.
The AUD’s Fluctuations
Exchange rate data from any trading platform in Australia provides insight into the AUD’s fluctuating values over the years, reflecting the economic state and monetary policy decisions by the Reserve Bank of Australia (RBA). The AUD has seen fluctuations over the previous years. For instance, the AUD ended 2019 with a 0.34% deficit against the USD (at 0.70 USD) and fell further to 0.55 USD before recovering to 0.77 in 2020.
In 2021, the AUD crashed to 0.72 USD, holding the bearish trend into 2022, closing at 0.68 USD. 2023 saw the currency range between 0.68 USD and 0.63 USD. In March 2024, the AUD gained some value, reaching 0.66 USD. Although the AUD has shown fluctuations against the USD and other currencies, Australia’s economy remains robust, absorbing multiple internal and external events and staying afloat.
How the AUD Fluctuates and the Impact on Trade
Many factors impact the value of a currency in the forex market. Some of these are:
RBA Interest Rates
Australia’s apex bank, the RBA, sets the exchange rate to control inflation and grow the economy. In November 2023, the RBA increased the rate by 25 points, marking the 13th rise in 18 months after a year of economic turbulence. The current 4.35% is expected to hold until June 2024, when the RBA makes an announcement.
The interest rates impact all sectors and industries, such as housing and mortgage, loans, and the prices of goods and services. A higher interest rate attracts investors and raises the demand for the AUD.
Global Economic Conditions
Although there is a minimal global recession risk this year, the UN Trade and Development (UNCTAD) forecasts a 2.6% economic growth for 2024.
For context, this is just above the 2.% economic growth rate expected in periods of recession. Leading economic powers like the US, Japan, the UK, Germany, China, and Russia are making brave decisions to reverse or prevent a recession. The global economic conditions reflect Australia’s economy and force a response from the RBA. This, in turn, affects the value of the AUD.
Geopolitical Events
Political and geographical situations play significant roles in economic development, setting the stage for local and international businesses to do business (or not).
In 2022, KPMG Australia identified three key ways in which geopolitical risks affect Australian business: increased public scepticism and scrutiny of business, economics, and political collision in the region, as well as the inability to adapt to an evolving area. A stable geopolitical situation favours the economy and strengthens demand for the AUD.
Commodity Prices
The prices of goods and services impact the perceived and intrinsic value of the AUD in diverse ways. Higher commodity prices mean consumers spend more, increasing the consumer price index (an essential indicator for inflation). A higher CPI may reduce the demand for the AUD as investors move to safer currencies.
Impact of AUD Value on Trade
So, what happens when these factors make the AUD fluctuate? How does the currency’s volatility impact trade?
Competitive Exports
A weaker AUD means that international markets buy goods and services from Australia at a cheaper rate. While that is generally a negative sign for the economy, local exporters may benefit from the situation as their goods become competitive in international markets. This increases export revenues and may boost the demand for Australian products. A higher AUD exchange rate may make products less competitive in global markets and decrease demand.
Import Costs
Importation costs also change according to the exchange rate. Higher rates mean higher lower importation costs, as importers pay less due to a stronger AUD. The demand for imported materials may increase as manufacturers seek lower production costs to improve profit margins. Australian businesses typically consider forex rate forecasts when planning their trade and acquisitions.
Inflation and Interest Rates
Currency fluctuations have a more negative impact on the economy, increasing the inflation rate. The going currency rate also impacts inflationary pressure. Higher inflation rates pressure local businesses as they struggle with lower profits and rising production costs. The RBA usually steps in with monetary policy decisions to stabilise inflation and stimulate economic growth.
Changing Consumer Behaviour
As inflation rages and the currency fluctuates, consumers adapt to price changes to save money. Many consumers may opt for other brands with lower prices or stop buying altogether. Slowing consumer purchases, in turn, affects businesses by decreasing revenues and profits.
In response, manufacturers often decrease the quantity of goods or increase the prices to stay afloat. This Statista report indicates that more Australians opted for bulk purchases and buying in advance to save money.
Investing in the AUD Amidst Fluctuations
Fluctuating AUD prices present both risks and opportunities for investors. While local businesses can increase their profit margins when the currency is more robust, they may experience significant losses if the price fluctuates downwards. Investors must consider the factors influencing interest rate decisions and the economic strength before buying the AUD.
All images: Supplied.
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