Outlook Only Getting Worse for Australian Dollar
2015 has been a terrible year for the AUD to USD exchange rate. At the beginning of the year, one Australian dollar could get you $0.8168. Today, one Aussie dollar is only worth $0.7162. That is, the Aussie dollar has gone through a massive 12.3% depreciation against the U.S. dollar in less than 12 months! The recent rate hike by the U.S. Federal Reserve certainly didn’t help the case. With oil and gas prices plunging, the outlook for the Australian dollar in 2016 is only looking worse.
Why AUD/USD Is Doomed to Stay Low
If you look at what Australia is exporting these days, you’ll see why the Aussie dollar is having a hard time. In 2014–2015, Australia’s top exports in goods and services were iron ores and concentrates, coal, education-related travel services, and natural gas. (Source: “Australia’s Trade in Goods and Services 2014-2015,” Australian Government Department of Foreign Affairs and Trade, November 25, 2015.)
Iron ore prices have tanked quite a bit in recent years. In early 2014, iron ore fines were trading at more than $100.00 per ton. Now, they are trading below $50.00 per ton. Coal prices also suffered during this period, while plunging natural gas prices need little introduction. Add it all up and we get a gruesome situation for the AUD to USD exchange rate.
This might only be the beginning.
One force that could drag down the Australian dollar in 2016 is China’s economic slowdown, as the country is Australia’s biggest trading partner. Australia has been selling iron ore, coal, and other minerals to China in huge quantities. If China’s construction slows, it could demand less iron ore. Additionally, if China put in more regulations on the burning of coal, it could demand less coal from Australia. With one-third of Australia’s exports going to China, any kind of slowdown in the Middle Kingdom could have a serious impact on Australia’s export sector and that could affect demand for the Aussie dollar.
Australia’s dismal trade balance has been adding serious downward pressure to the AUD/USD exchange rate. On December 3, the Australian Bureau of Statistics released its trade balance numbers for October 2015, which showed that the country’s trade deficit widened much more than expected.
In October, Australia had a trade deficit of $3.3 billion, much worse than the $2.6 billion estimated by economists. Moreover, the number is worse compared to September’s deficit of $2.4 billion. Since trade balance plays a rather important role in the foreign exchange market, widening trade deficit in Australia would not be good for the currency. (Source: “International Trade in Goods and Services, Australia, Oct 2015,” Australian Bureau of Statistics, December 3, 2015.)
Some might say that the situation in Australia’s labor market could help turn things around. Prior to the release of the most recent jobs report by the Australian Bureau of Statistics, analysts were expecting a 100,000-job contraction in Australia’s employment and an uptick in the jobless rate to six percent.
What were the actual results? The Australian economy added 71,400 jobs, while the unemployment rate declined to 5.8%, which completely surprised the markets. Moreover, the workforce participation rate improved 0.3%, hitting 65.3%, which also beats expectations of 65.04%. (Source: “Labor Force, Australia, Nov 2015,” Australian Bureau of Statistics, December 10, 2015.)
The thing is that despite the solid numbers coming from the labor market in Australia, employment in the U.S. is growing as well. In November, the U.S. labor market added a very impressive 211,000 jobs, better than the expected addition of 201,000. Moreover, the U.S. unemployment rate remained at five percent, a seven-year low. (Source: “Employment Situation Summary,” Bureau of Labor Statistics, December 4, 2015.)
The Bottom Line on the Australian Dollar in 2016
Mind you, the U.S. Federal Reserve is forecasting as many as four rate hikes in 2016, while the Reserve Bank of Australia could conduct further easing of monetary policy to boost its economy. However you look at it, the outlook for the Australian dollar in 2016 is gloomy to say the least.