Overnight, the AUD fell 1.4% to hit 70.72 US cents. At the time of writing it’s trading at 70.45 US cents.
The AUD has been recording falls against the US dollar for the last four days. It has dropped over 3.5% since last week.
Lower rates and iron ore prices are bringing the AUD down
The drop in the Aussie dollar comes as expectations run high on the fact that the Reserve Bank of Australia could be cutting rates soon from the current 0.25% record low.
Both NAB and Westpac are betting the RBA could cut rates as early as October.
It comes after RBA’s deputy governor, Guy Debelle, said in a recent speech to the Australian Industry Group that interest rate cuts and negative rates were still on the table.
As Debelle said:
‘The empirical evidence on negative rates is mixed. In the short-term, they can contribute to a lower exchange rate. In the medium term, the effectiveness can wane including through the effect on the financial system.’
Another factor affecting the Australian dollar is iron ore prices, which is Australia’s biggest export.
Iron ore prices increased earlier this year after Brazilian Vale’s operations suffered disruptions from the pandemic and demand from China recovered quickly after the pandemic. With Vale’s supply starting to return into the market, iron ore prices have been dropping.
Still, the AUD is up around 28% against the US dollar since the March lows
The US dollar has been on a decline since March, not just against the Australian dollar but also against other major currencies.
The DXY, which measures the US dollar against a basket of six major currencies, is down close to 9% since March.
The US has been flooding the economy with money, which lowers the value of the currency. The US has also lost ground after the Fed said they will be keeping interest rates at near zero even if inflation runs above than their 2% target.
The issue with a weaker dollar is that it affects the rest of the world, as it’s the world’s reserve currency. It makes US exports cheaper and imports into the US more expensive. It brings inflation higher in the US and lowers inflation expectations in Australia as exports become cheaper.
Where will the AUD go next? The Rum Rebellion’s editor Greg Canavan tackles this question in his report ‘Will the Aussie Dollar Enjoy a Post-Pandemic Resurgence?’.
You can access this free report here.
For The Rum Rebellion