The Australian Dollar is the fifth most traded currency in the world according to multiple sources, with website ‘Countries of the world’ stating it has an average turnover of US $353 billion which is $92 billion more than sixth place Canadian Dollar, as of November 2020. The currency is so popular amongst traders for multiple reasons including high interest rates, economic stability, and low government intervention. In 2020, traders who have hedged in the Aussie Dollar have been rewarded with annual appreciation, in a year where few currencies have experienced an increase in value.
Against the U.S Dollar, on January 1st the Australian currency stood at $0.702, which rose to $0.742 on December 4th as seen in the exchange rate graph, which amounts to a 5.7% increase in value. On the surface, this doesn’t seem so remarkable, however given the current context with COVID, this is quite impressive. It is important to remember too that the U.S Dollar was one of the only currencies to gain value during the initial wave of the pandemic. Against the Pound Sterling, the Australian Dollar also increased in value, while also staying even against the Euro and Japanese Yen. As of December 4th, 2020, the Australian Dollar had only equalled or gained in value against its other top five traded currencies.
Why has this been the case and what does it mean?
A slow start
Until March 19th 2020, where the Aussie Dollar hit a year low of $0.574, the currency was not performing well for various reasons, highlighted in an article by Australian news outlet ABC. In 2019, it was constantly losing value, due to interest rate cuts introduced to combat a weakening economy at the start of the year. Secondly, trade tensions between the U.S and China hit hard, as according to the article ‘Australia has more to lose than most countries from US-China trade, given its economy is tied in tightly with both economies.’ As well as this the bushfire crisis peaked in January 2020, leading to bleak predictions about Australia’s economy is the near future, with COVID also on the rise. Together, these factors caused Australia’s national currency to drop from US$0.702 to $0.574 in just over two months, with the bulk of the loss occurring early March. On March 19th, the Australian Dollar experienced its last day of depreciation for the year. On this day, the Australian Reserve bank announced it will initiate quantitative easing for the very first time in the country’s history.
Across the globe, there has been a strong correlation between a currencies value, and how well the country has handled the Coronavirus. Australia has dealt extremely well with coronavirus, experiencing less cumulative cases than most countries, with a small sample shown in the graph below. They have experienced 27,949 cases, with the next lowest being China with 85,686. Naturally, dealing better with the virus will have positive effects for a currency, with economic activity occurring and their being more confidence in the country.
Due to COVID-19, nations have committed to expansionary policies, also known as global stimulus packages, in order to get economies back up and running. This has meant that investors have switched to more riskier markets, such as stocks rather than safer markets, which has also benefitted the Australian Dollar, due to Australia engaging in such activity. An article published by Bloomberg discusses the rise of the Aussie Dollar against the American counterpart, explaining: ‘It’s climbed to a 15-month high against the US dollar due to a widening yield differential between Aussie bonds and U.S. Treasuries as the Reserve Bank of Australia dismissed the possibility of negative interest rates, while Governor Philip Lowe said that the currency was broadly in line with economic fundamentals.’
Is this rise good or bad?
To get an answer for this question, you have to look at it from different perspectives, as for different people the rise of the Australian Dollar means completely different things. For investors who hold reserves in the currency, the soaring trajectory is clearly a huge win, especially those who invested around March. As the Dollar gains value against other currencies, the investment proves increasingly worthwhile.
For the Australian government, the story is different, with local newspaper The Sydney Morning Herald labelling the growth as ‘counter-intuitive.’ Naturally, you would expect a strong currency as an effect of a strong economy, however for Australia it is the complete opposite. Midway through the year, it was declared that Australia had entered its first recession in just under 30 years. The last thing Australia needs is a strong currency, as an exporting commodity country. Boasting the second largest Iron Ore reserves in the world and the fifth largest coal and gas reserves, the economy is heavily affected through exports. A rising Dollar means that Australian exports are priced out of the market, and demand for their goods will suffer, only fuelling the recession further. Despite this, in a report for The New Daily, an Australian news outlet, AMP Capital senior economist Diana Mousina explains that ‘70 cents (The growth as of June 10th) is fortunately not high enough to jeopardize our exports.’ With the currency surpassing that, and still climbing, it will be interesting to see whether this stance will change.
— Fyggex (@fyggexchange) August 12, 2020
*Disclaimer: Fyggex, does not give any guidance, advice or recommendations to neither invest or not in any available normal currency or cryptocurrency directly or indirectly via any trading platform, exchange or provider. Our sole purpose is to make you aware of the related real or potential risks and opportunities so that you can make your own research prior to any financial decisions you may want to take. Past performance and position are not a guarantee of risk-free future returns.