Australia – Falling dollar fails to support all Australian exporters
World Risk Developments October 2019
Though the Australian dollar has reached its lowest rate against the US dollar in 10 years, some exporters will miss out on a competitive boost because the Australian dollar remains relatively stable against the UK pound, the euro and Chinese renminbi.
Commodity prices are strong at present, and ordinarily that would buoy the value of the Australian dollar. But the currency has fallen around 5% against the Trade Weighted Index (TWI) since October 2018 (Chart). Weak domestic conditions have prompted the Reserve Bank to cut interest rates thrice in 2019, which has reduced Australian interest rates to historic lows, placing downward pressure on the Australian dollar. And rising international uncertainty has driven investors towards safe haven currencies such as the US dollar (USD) and Japanese Yen (JPY), further weakening the Aussie.
The depreciations against the USD, JPY and TWI have delivered a broad competitive boost to exports. But it is important to note that the dollar’s decline has differed according to the trading partner. Against the pound and euro, it has remained relatively steady. The pound has weakened due to Brexit uncertainty, and the euro due to official interest rate cuts, weak export demand, sluggish investment growth due to Brexit uncertainty and the possibility of US tariffs. Therefore, industries with large European export markets, especially domestic tourism, should not expect to receive any considerable spike in demand given the weaker domestic conditions in these regions.
The Chinese renminbi has also remained relatively stable against the Australian dollar. The renminbi has depreciated against the US dollar as a result of the escalating trade dispute between the US and China, which has hurt the Chinese economy and limited foreign investor demand. Increased Chinese infrastructure spending have propped up Australian resource exports to the region. But other industries that rely on Chinese demand, such as education and tourism, are likely to face headwinds.