How will the AUD react to the market?

  • By Harrison Cole

  • December 28, 2018
  • 9:01 pm BST

Questions as to the Australian dollar’s direction have been raised in hopes of a reprieve from a looming global financial crisis, but as the markets plummet and the AUD is hit hard, forex trading rookies and seasoned traders alike are now more anxious than before. Fears of a market meltdown abound, but analysts say that understanding how the AUD rises and falls compared to other currencies can alleviate these concerns.

The AUD’s movement

Investors and institutions wanting the same thing – to benefit from the rise and fall of a currency pair – influences exchange rate movements. Those who recently fled from the AUD in an AUD/USD pairing, for example, think that the currency is going to fall. Under current market conditions, the AUD is not in demand, and this is affecting its price, according to analysts. Should there be a rally, its value will go up.

Global growth or lack thereof

The outlook for global growth affects the AUD like any other currency. Whenever forecasts are gloomy, the AUD/USD will suffer from a downward trend. The AUD will lose value against the USD in times of volatility such as the past few days. This is one of the most sensitive issues of the moment considering what is happening around the world. Apart from China and the US arguing over trade, the Eurozone is showing signs of a slowdown. Some member nations have reported deficits, while others are contracting. Brexit is also a cause for concern as UK Prime Minister Theresa May grapples with what will happen if her proposal does not go through the House of Commons. The timing of the rates hike in the US is also contributing to global economic volatility, according to reports.

When the global financial markets are doing well, the value of the AUD against the USD is higher.

Trade relations and their effects on the AUD

While the usual safe haven is the USD, as it is the world’s reserve currency, investors are looking into other options now. Whether the USD remains a good safe haven or not, the AUD will not see any benefits, as global financial markets are on a downward trend. However, there is a way for Australia to ensure that the AUD does not fall too much or too hard. Trade can predict its wellbeing, according to experts. Commodities such as coal and iron ore are some of the country’s biggest products. As long as these are in demand and maintain their prices, they will keep the AUD afloat. A significant fall in the prices of iron ore and coal, however, will result in a sharp fall. By extension, the low demand for these raw materials will reduce other countries’ need for the AUD since they will no longer have to exchange their money to buy said products. This is also the reason why the Australian Trade Ministry is working on strengthening its ties with the Eurozone to ensure that Australia can have more trading partners. Doing this will bring in more export opportunities and, of course, will also help the currency.

Australia has good trade relations with China, and when its economy was growing, the Chinese bought a lot of Australian resources for their numerous builds. This strengthened the AUD and also heightened its appeal to forex traders. With over three-quarters of Australia’s exports sent directly to Asia, the AUD sees effects when Asian currencies are experiencing downward pressure. With Asian stocks plummeting, there is pressure on the AUD as well. China’s demand for resources is down, and with Asian stocks on a downward trend, the AUD’s appeal has also diminished.

Understanding all of these issues is crucial for investors, as it helps them make educated decisions on whether they should sell or buy a particular currency, according to experts.

The current situation

As of Wednesday, a relief rally for the AUD had already begun. Significant support took place, but there is still room for the AUD to break below 0.70. Analysts hope, of course, that the rally continues, but they are on the side of it falling. Hitting the 0.7250 level will mean that there is massive resistance, and this figure increasing will be quite a surprise, experts say. Sellers will come back at one point, however, especially if good news comes along.

The AUD/USD currency pair will likely be sensitive to the trade standoff between the US and China. This conflict has been making the headlines in the past few months, leading many to worry that it will cause a major fall. The relationship between the two countries is currently on thin ice. Selling rallies will likely take place, but liquidity might be thin. Traders will be making their money work, and they will need lots of it.