A surprise this year has been the strength of the $A after it hit around 55c against the greenback in the COVID-panic earlier this year on the markets.Currently the Aussie is buying around 74c.
Sourced from the RBA
There are likely two main drivers of the strength:
- Unlike the US, our rates were already very close to zero (0.5%) when the crisis hit earlier this year. The US Fed had hiked rates over 2%, meaning that when both central banks cut to zero, it was a larger easing in the US, ergo downward pressure on the US dollar.
- Commodity prices: have surprised on the upside, with record Chinese steel production boosting iron ore prices to massively profitable levels, currently around US$123/ton. Other commodity prices have also done relatively well, nickel is another one benefiting from massive Chinese demand and optimistic sentiment over electric vehicles.
How much higher can it go? Well the first factor has played out, while the consensus is iron ore prices will moderate from current levels. Seemingly, ‘not much’.
However, forecasting commodity prices is notoriously difficult, no-one saw iron ore prices increasing 50%+ when the world economy seemingly shut down earlier this year.
The US election is also rapidly drawing closer which could be another key sensitivity. Escalating civil unrest in the US is a large and growing risk, compared to Australia. My money would be on Trump being returned currently, but it will be interesting to observe.
The positive of a higher $A is cheaper imports (which could flow through to e.g. cheaper electrical goods etc at retail stores) however it will also threaten the competitiveness of key services such as international education and tourism. At the moment that’s largely a moot point anyway due to travel restrictions.
The strength of the $A has been a pain trade for those unhedged in US markets, yet the recovery there has softened the blow. For overseas investors who bought into Australia at the March lows, they may have made a motza as equity prices moved higher with the local currency.