Chart of the Month - April 2024

It’s not looking good for the Australian dollar. The AUD has been trending down against the greenback since 2021 (AUD/USD)(see chart below). Now, several factors have come together to add a few more anchors to the AUD; it’s down around 6% since December 27 and 1.3% since the end of March.

COVID-19 and China

In a world of lockdowns, Australia’s mineral exports to its biggest trading partner suffered. Soon after, a political and trade spat also led to Chinese bans on some key Australian exports. And in comparison to big-spending US consumers, who also faced less stricter lockdown measures, increased Australian spending on e-commerce and online food delivery apps was not enough to stop the AUD from falling against the USD. 

Our slowing economy

As the RBA has applied its monetary-policy brakes, inflation has slowed but so has Australia’s growth. GDP only grew 0.2% in Q4 2023 while retail sales fell from 2.1% and 1.1% in December and January to 0.3% in February (seasonally adjusted).

Unemployment remains low but job vacancies continue to fall from their peak in August 2022.

On top of this, the Westpac - Melbourne Institute consumer sentiment index decreased by 2.4% in April following a 1.8% decrease in March. Australian consumers have now been in dumps for over two years (see chart below)!

So long as inflation continues to fall (or at least not rise), the RBA will cut rates this year and when it does, the relative difference to US interest rates will see forex traders sell the AUD against the greenback and the AUD will fall even further.

China’s slowing economy

Despite China’s higher than expected GDP growth in the March quarter (5.3% vs 4.8% on an annual basis), the mood around the Chinese economy is dour. The property crisis continues to drag on without the big government stimulus hoped for by the markets.

The rebound in Chinese consumer spending after the COVID lockdowns is maybe still coming? Chinese consumers have started to travel more domestically as seen during the Lunar New year holidays but they are not venturing abroad like they used to. Further, luxury brands and even the iPhone have taken hits as low consumer confidence mixes with nationalism.

Trade relations with Australia have recently improved with the lifting of the coal, wine, and other import bans. However, the pessimism around the Chinese economy is weighing against the AUD relative to the USD, as Australia is seen as a good proxy for Chinese growth, given its iron ore and coal exports to China. These clouds of pessimism are not expected to lift anytime soon.

Then there are clouds of possible trade sanctions on the horizon. The US and EU are sensitive to a ramp up in cheap Chinese EV and green technology exports. US Treasury Secretary Janet Yellen visited China in early April and delivered a warning:

“I think the Chinese realise how concerned we are about the implications of their industrial strategy for the United States, for the potential to flood our markets with exports that make it difficult for American firms to compete,” Janet Yellen.

The US’s strong economy

The market had been hoping that Fed chair Jerome Powell would cut the Fed funds rate as early as June but a stubbornly high March inflation report, the continued strength in the US labour market, and stronger than expected March retail spending all points to interest rates being higher for still longer.

“More recent data shows solid growth and continued strength in the labour market, but also a lack of further progress so far this year on returning to our 2% inflation goal,” Jerome Powell, remarks at the Wilson Center’s Washington Forum on the Canadian Economy, April 16.

And if US interest rates stay higher while Australian rates start to come down, the carry trade in currencies will drive the AUD further against the USD. The expectation of this can likely explain much of the downward trend in the AUD so far in April.

The impact on the Australian economy

There are winners, losers, and those few who are perfectly hedged against the USD.

Our big miners, who are mostly paid in USD, will be getting more in AUD terms. Imports from the US will be more expensive, which will hurt those buying vehicles and machines from the US (see chart below).

Oil which is typically traded in USD will also be more expensive in AUD terms. Higher car and petrol prices will keep some upward pressure on inflation.

However, exports to the US will be cheaper, which will help boost revenue for our farmers and CSL (see chart below).

Final thoughts

In my lifetime, I’ve seen parity and the AUD below 50 US cents, and each time the forecasters were surprised. Currencies love to under and overshoot. Forex trading is a tricky business. However, as far as the AUD is concerned, there is no good news on the horizon, and so the AUD is stuck with that sinking feeling for now. It is a feeling shared by many other currencies, who, for now,  are also bowing to the mighty greenback.