It’s official, the Aussie Dollar is still in a freefall. The Asian economic nightmare has hit us all to the core and the Australian economy looks set to take another step down the tubes. Will the Reserve Bank of Australia (RBA) be able to maintain a loose stance while it deals with this unprecedented economic disaster? This article will provide some analysis on the situation.
The RBA has released some neutral statements indicating that they are keeping their powder dry for now. It is widely speculated that the current weakness of the Australian Dollar is being driven by the US Federal Reserve, which continues to ease monetary policy (meant to stimulate the economy) in order to get the economy back on track. However, it is widely believed that the central bank is keeping rates low to keep a lid on possible inflationary pressures in the world’s most important economy. This is why the currency market is showing a worldwide interest rate pattern of continued weakness, with only a handful of exceptions.
Meanwhile, Australia’s main economic issues are pretty much a matter of fact. Gross Domestic Product (GDP) growth figures have continued to disappoint, job cuts and other indicators suggest consumer weakness and slower growth. It seems the global economy is largely taking a hit (including the Aussies), which is why the currency market is showing a world wide interest rate pattern that indicates the interest rates may continue to fall. The economic outlook is not looking good for the Aussie Dollar.
Now that the global outlook looks bleak, the Aussies have one more important task to address. The current strength of the Australian Dollar is built on very strong economic fundamentals – in particular, massive budget surpluses that will hopefully allow the government to run cheap deficits for the foreseeable future. If this occurs, the current strength of the Australian Dollar (and likely other major currencies) will be threatened by a rapid deterioration in global growth. In the end, the result could be a sharp reduction in the Aussie Dollar against the leading global currencies.
Global economic worries mean that the current low interest rates and massive budget surpluses needed to keep the Australian economy growing are no longer a possibility. As banks and businesses struggle with the loss of investor confidence (which is starting to spread to the non-financial sector), more investors will turn away from the market, reducing the demand for the Australian Dollar. This would seem to be bad news for the Australian Dollar, but on the contrary, because if the market were to become too tight, the central bank would find it difficult (if not impossible) to continually hike the interest rates to restore investor confidence. This scenario seems to be the antithesis of economic prosperity.
If this occurs, then another consequence of this scenario could see the Australian Dollar appreciate in value against all major currencies, including the US Dollar, as investors worldwide become more concerned about the state of the global economy. As a result, the Australian Dollar would likely trade above US Dollars in the coming period. It is at this point that the wise investor would start to put some money into the Australian Dollar, or even invest in the Australian Dollar itself. The current low interest rates should only be seen as a temporary, positive by the majority of professional Forex traders.
More negative news about the Australian Dollar should be welcomed by the current financial institutions in the country, as they look to protect their own interests. For example, the Reserve Bank of Australia (RBA) is reported to have kept interest rates at a record low to help slow the economy. The central bank is also said to have considered quantitative easing, which would involve the creation of new money that would directly compete with existing financial instruments in the market, such as the Australian Dollar. Quantitative Easing will, in the long run, help the Australian Dollar and make the financial markets less chaotic, which is exactly what the current economic situation is urging the government to do.
Currently, most of the market participants think that the interest rates will remain on hold for now. They believe that it is too soon for the market to return to a bullish state, especially given the large scale efforts that have been made to keep the economy on track. This does not mean that the Australian Dollar is now a safe haven investment, because there are still risks involved in investing in the Forex market, including possible appreciation of the currency. However, with all that said, the Australian Dollar is an attractive option when trading in the foreign exchange market. One should keep a close eye on the movement of the Australian Dollar, as it may provide good short-term results, but also provides ample opportunity to profit in the long run.