The Australian dollar dipped to US69.09c on Friday, the lowest level since April 2009 as the Australian economy slows and the US economy begins to show momentum. Interest rates and commodity prices have been the catalysts and we expect the trend to continue.
The Australian dollar is heavily impacted by commodity prices, and more specifically iron ore prices, with the correlation clearly evident over the last 12 months. Since September 2014, the Australian dollar has lost approximately 25 per cent when compared to the US dollar, very much in line with the iron ore price, losing approximately 32 per cent. China’s economy, the biggest user of Australian iron ore, has been on somewhat of a roller coaster as it’s stock market continues to remain volatile and the economy shows signs of slowing. With no forecasted increase in iron ore demand in the short term, the price is set to remain low.
Following weak economic data from China and slow Australian economic growth, many economist expected the RBA to further cut interest rates in September, however rates were kept at the record low level of 2.0 percent. Going forward, relatively weak data has indicated that the RBA will continue with the low interest rate and possibly announce another cut later this year.
Conversely, US economic growth has been gaining momentum with strong employment data announced last week. The Fed has kept interest rates at 0.25 per cent since 2009 and is expected to raise rates before the end of the year. The expected increase in US interest rates will attract investors and subsequently the US dollar will continue to strengthen.
Going forward, with the US economy gaining momentum and likely raising interest rates and Australia’s economy slowing and likely cutting interest rates, we expect to see the Australian dollar fall further, with many predicting as low as US60c. All eyes will be on the US Federal reserve next week as they meet on the 16th and 17th to make to the official interest rate decision.
Author: Ben Visser
Sep 07, 2015
Ben is a Wise-owl equity analyst focusing on ASX blue-chips stocks. Ben has a Bachelor of Business in Finance majoring in property valuations and management. In his role at Wise-owl Ben conducts in-depth fundamental and technical analysis which helps him to find profitable investment opportunities on the ASX and abroad.