The falling dollar: we ask the experts

The Australian dollar is on a roller coaster ride at the moment, falling from a recent high of US$1.03 in May this year to a current 3-year low of just US$0.92. So where to from here?
Ray Attrill is the Global Co-Head of FX Strategy for National Australia Bank and Paul Edwards is Head of Corporate Sale, HSBC Global Markets. We put some questions to them in terms of why the dollar has fallen and where it is potentially heading.

q:-firstly,-what-caused-the-australian-dollar-to-rise-so-strongly-in-the-first-place?">Q: Firstly, what caused the Australian dollar to rise so strongly in the first place?

A: “The prior strength of the AUD against the USD should primarily be viewed as the flip-side of US dollar weakness that in turn has emanated from the easy-money policies of the Federal Reserve (very low rates ever since the dotcom bubble burst in 2001) and later near-zero rates combined with the Fed?s unconventional (or “QE”) policies since the onset of the global financial crisis,” says Mr Attrill. “Contributory factors have been the exceptionally low levels of currency volatility seen until very recently, which makes the attractions of the AUD as a ?carry trade? currency that much stronger, the increasing demand for AUD as a reserve currency by many of the world?s central banks and sovereign wealth funds.  And, through 2011, the strength of Australia?s commodity export prices driven in large part by demand from China.”

“While almost all developed markets went into recession, emerging markets continued to grow and demand for minerals and resources began to drive commodity prices higher, adds Mr Edwards. “As continued demand for resources continued and consumption patterns in emerging economies continued to evolve so did demand for more commodities (hard and soft). This resulted in further investment into Australia.

As the GFC took hold and conditions in the North Atlantic nations deteriorated, the growth in emerging markets continued to support demand for commodities which in turn created further demand for exposure to Australian assets as this region was one of the only established economies of the world growing. With various G20 nations suffering sovereign rating downgrades, Australia benefitted from the investment community’s desire to place funds in AAA assets. This saw the reserve status of the AUD improve (as a safe haven) which also drew more investment flows into Australia.”

q:-so-what-are-the-main-general-factors-causing-the-current-sharp-fall?">Q: So what are the main general factors causing the current sharp fall?

A: “Some signs pointing to the long term economic decline in the US are receding, and now instead of looking at downgrades, forecasters are lifting growth estimates in the US,” says Mr Edwards. “The US Federal Reserve forecasts are also being upgraded. While conditions are still fragile in terms of outright strength, there are real sings that conditions are improving there.  This improvement is seeing investors consider a reallocation of their investments back towards the US. As Australia was a prime beneficiary of the in-flows over the past five years as the US was in decline, it stands to reason that the AUD will fall in lockstep with the USD rise. Also the RBA has continued to cut AUD cash rates and has spoken publically that it thinks the AUD is too high.

q:-the-$aud-seems-to-be-falling-more-sharply-than-some-other-currencies-–-what-is-causing-this-sharper-fall?">Q: The $AUD seems to be falling more sharply than some other currencies – what is causing this sharper fall?

A: “To some extent it?s a case of the ?bigger they are the harder they fall?,” says Mr Attrill. “Since the AUD has been one of the prime beneficiaries of US dollar weakness, it is logical it should be one of the biggest losers as the US dollar now finds renewed strength.  Plus the sharp rise in foreign exchange market volatility has killed the attractions of the AUD as a carry trade. Concerns regarding slipping China growth and how that impacts on commodity prices has also had a negative impact on sentiment towards the currency.”

q:-where-do-you-see-the-$aud-heading-over-the-next-12-months?">Q: Where do you see the $AUD heading over the next 12 months?

A: “Almost certainly the AUD will continue to head lower, assuming that the rise in US bond yields has further to run (i.e. that the Fed does succeed in being able to extricate itself from its current QE/bond buying program),” says Mr Attrill. “Our forecasts are currently being reviewed, but it is likely the AUD will be trading well below 90 cents next year.”

Mr Edwards agrees: “As conditions in the US continue to pick up it makes sense that we should see further broad-based strength in the USD against many currencies,” he says. “However, a growing US economy is good for global growth which in turn should ultimately be supportive of the AUD. So we are not expecting wholesale losses from these levels but an AUD around the 0.8600 levels in the next 12 months is quite reasonable a scenario.”

Back to International Money Transfers…