Aussie Dives

by | Dec 5, 2014

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Australia

Neil Davies, Head of Trading at PlutusFX, takes a look at the Aussie Dollar.

The Aussie Dollar has dropped to a four and a half year low, currently standing at AUD/USD 0.837 and continuing what has almost been a straight line fall from the short term peak of just under 0.88 touched on 17th November.

Australian GDP expanded 0.3% in Q3, down from 0.5% in Q2, whilst entering a technical income recession. Year on Year growth stands at 2.7%, below the long term average. Growth has been led by export volumes, but business inventories have been weak along with public and private sector investment. Real net national disposable income shrank by 0.3%, led by the decline in commodity prices.

Its long been thought that the Aussie has been overvalued, so perhaps at last there is some catch up going on. The commodity led currency has been significantly hit by falling commodity prices, with the term of trades, export earnings purchasing power of imports, having now fallen 8.9% year on year. This is further feeding through into weaker corporate profits and declining tax receipts. Indeed, Australia could now be on a downward self-fulfilling spiral, with a feed through into softer public spending, business development and public demand. This will curtail any hopes that non-resource industries will be able to pick up the slack from the mining industry boom and with the winding back of mining projects still having a long way to go, there is no turnaround in sight.

For Australia there are only two ways this can improve; the Aussie continues its decline and commodity prices rise. The former is being granted but the later, with worldwide growth in its current state, may be some way off.

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