Resilient Australian dollar (AUD)

Why AUD is holding its own in today’s volatile times?

When forecasting exchange rates movements, like for the AUD, just getting the direction right can be celebrated. Predicting shorter-term movements, say over the next month or two, can be even more challenging.

Resilient Australian dollar (AUD)

You need to take into account the heritage of a particular currency while forecasting moves in its exchange rates. Every currency has its heritage, be it USD or be it AUD. US dollar (USD) is at the stable or defensive end of the spectrum while Australian dollar (AUD) is at the riskier end of the spectrum. US dollar rises when world economy wobbles as capital flows into US assets in such a scenario. Reason is simple, US is the largest economy in the world and its currency is world’s reserve currency.

On the other hand Australian dollar AUD) is a risk-on currency and rises when global growth rate is robust and commodity prices are rising. As Australia is a powerhouse commodity exporter its economy will boom in such a scenario pushing up the exchange rate of its currency AUD.

AUD showing signs of far greater stability than in the past

AUD trading below its post-float average of US75¢ is not a surprise in light of elevated geopolitical fears, high US interest rates and fears of a global recession. China’s reopening and accelerating growth profile has also failed to lift the currency sustainably above 70¢ this year. Yet, in some respects, AUD is showing signs of greater stability than in the past. Global recessions have often caused Aussie dollar to nosedive below US60¢ (which it in fact did briefly in March 2020). In fact, the statistical volatility of AUD over recent years has been virtually half that during the past two decades.

Risk correlation lessening

UBS recently stated that the resilience of AUD, despite fears of a global recession mounting, may be indicative of its risk correlation lessening. UBS cites a couple of reasons for this, which are quite intuitive. First, Australia has got rid of current account deficit. For the past six years, on the back of rising commodity and energy exports, Australia has been registering huge multibillion-dollar monthly trade surpluses. Second, Australia’s globally significant superannuation system is amassing large swathes of foreign assets. Australia has turned around an historic negative overseas investment position to a surplus of 35 per cent from a deficit of 60 per cent of its annual output, states UBS.

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