What newfound bullishness for the Aussie dollar means for local businesses
29 November 2024
Predicting the direction of currency markets is a difficult and often frustrating endeavor, and the prospects for the Australian dollar have become less certain following the US presidential election. But with access to a flexible source of capital such as securities-backed financing, businesses can react nimbly to changing circumstances and obtain appropriate hedges, while investors can rebalance their portfolios as needed.
Expectations of sweeping US tariff increases under Donald Trump led to the US dollar rising against most other currencies in November. The Australian dollar, which in September appeared to be on the verge of breaching the US$0.70 level, fell to US$0.65 ahead of the November 19 monetary policy meeting of the board of the Reserve Bank of Australia (RBA).
The Aussie remained steady following the meeting as the RBA indicated that it was likely to retain its current restrictive monetary policy stance given that inflation was still “too high.”
The Australian dollar’s exchange rate relative to other major currencies is determined largely by interest rates. Although the RBA has not yet followed the lead of the US Federal Reserve in kicking off an easing cycle – a second cut in November brought the Fed’s benchmark overnight borrowing rate to 4.50%-4.75% – the RBA’s key cash rate still remains lower than that of the US, at 4.35%.
This is historically rare and has contributed to keeping the Australian dollar relatively cheap. As a result, exporters have become more internationally competitive and their profits have risen in AUD terms, but imports cost more in local currency, contributing to inflation.
This marks a turnaround from the decade leading up to the pandemic. For most of the 2010s, the RBA had set interest rates well above those of other developed economies, as the US, Japan and Europe held policy rates close to zero in the wake of the 2008 global financial crisis to stimulate their economies and boost the competitiveness of their exports.[1]
During that time, the Aussie dollar was arguably stronger than models suggest was optimal, supressing Australian inflation and growth in wages.[2] On the other hand, in the recovery from the pandemic and following the Ukraine shock, Australia’s monetary policy has been looser than that of competitor economies, with the Aussie dollar not rising appreciably despite the surge in commodities prices in 2021-2022.
Now, with the RBA intent on keeping inflation in check while the US eases, Australia’s interest rate could continue to rise relative to that of the US, which, in turn, could lead to the Aussie dollar rising against the US dollar into 2025.
In light of this, in October, just ahead of the US presidential election, institutional investors finally abandoned the bearish view they had held on the Australian dollar since February 2023.[3] The newfound bullishness is driven not only by expectations that the RBA would avoid cutting interest rates to control inflation, but also by hopes that China’s stimulus push would revive the economy of Australia’s biggest trading partner.
The RBA has highlighted three major offshore risks to Australia’s economy and currency: the potential for “major changes” in US economic policy; the magnitude of China’s stimulus differing from expectations; and the general risk of unsustainable growth in government debt.
Still, with the falling interest rate differential, some are decidedly optimistic about the Australian dollar’s prospects. Morgan Stanley, for example, predicted that the Australian dollar would be one of the top performing major currencies in 2025, rising to US$0.72 by the end of 2025.[4] The bank’s strategists explained that even though the potential for higher tariffs posed a headwind to growth, this was countered by falling US rates, which helps support global growth.
But others, including NAB, do not share that view. The Australian bank had previously tipped the currency to hit US$0.71 in Q1 2025, but after Trump’s election victory it said it did not think it could climb past US$0.70 until at least 2026.
Impacts on businesses
A strengthening Australian dollar has several implications for Australian businesses. Exports priced in Australian dollars would become less competitive, reducing demand for them. On the other hand, many of Australia’s largest exports are commodities priced in US dollars — these would bring in less revenue in Australian dollar terms, although many large companies also hedge currency risk, insuring them against the impact of currency changes on revenue.
Meanwhile, companies that serve the domestic market would benefit from the ability to purchase cheaper inputs from abroad. Australian businesses selling everything from imported automobiles to pharmaceuticals could thereby benefit.
Ultimately, the direction of the Australian dollar will depend on several variables, hinging on how other advanced economies perform and manage their monetary policies.
The outlook will clearly be more promising if the Fed lowers rates rapidly, the RBA sticks to its anti-inflationary stance, China’s growth reignites, and demand for commodities spikes on the back of improving macroeconomic and geopolitical conditions. It’s worth recalling that the last big commodities boom helped take the Aussie above US$1.10 in 2011.[5]
Whatever your view on the direction of the Aussie over the coming months, securities-backed financing provides the ability to leverage long-term shareholdings to access a flexible source of capital with which to turn your convictions into action.
[1] https://www.afr.com/policy/economy/why-the-rba-has-a-massive-public-education-job-to-do-20241002-p5kf70
[2] https://www.afr.com/policy/economy/erratic-aussie-dollar-a-factor-in-the-rba-s-missed-inflation-targets-20241023-p5kkjk
[3] https://www.bloomberg.com/news/articles/2024-10-14/asset-managers-ramp-up-bullish-bets-on-aussie-to-most-since-2021
[4] https://www.poundsterlinglive.com/aud/21111-australian-dollar-should-be-a-top-pick-next-year-says-morgan-stanley
[5] https://www.smh.com.au/business/the-economy/aussie-dollar-marks-40-years-of-resilience-and-china-reliance-20231212-p5eqt1.html
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