Skip to Content

Share this post

chart of the week: Is there any hope for the pacific peso?

13 September 2018

Bob Cunneen, Senior Economist and Portfolio Specialist

 

Australian dollar vs commodity prices


Source: Reserve Bank of Australia.

 

After a period of remarkable calm over recent years, the Australian dollar (AUD) has fallen sharply against the US dollar (USD) (blue line) over the past six months. For a currency which is colloquially known as the ‘Pacific Peso’, the AUD’s slide to 0.71 is hardly surprising given the conventional wisdom.  

The US economy is a strong performer currently with unemployment below 4% and annualised growth above 4%. The US Federal Reserve (Fed) is expected to continue raising interest rates. While Australia’s unemployment rate has gradually fallen to 5.3% and economic growth has picked up speed to 3%, the Reserve Bank of Australia (RBA) appears comfortable sitting still on interest rates. So the AUD seems destined to decline given higher US interest rates are likely over the coming year.

Yet the AUD is not a certain ‘one way bet’ to fall further. The USD still confronts the challenge of large US budget and trade deficits that require financing. Interestingly, one of the key fundamental supports for the AUD has actually improved this year. Australia’s key commodity prices as measured by the RBA have held up reasonably well (red line). Higher coal and natural gas prices this year have managed to offset lower prices for copper and aluminium. Provided that Australia’s key commodity prices remain resilient and the Australian economy maintains solid economic growth, the downside risk to the Pacific Peso could prove to be a temporary mirage.

Important Information

This communication is provided by MLC Investments Limited (ABN 30 002 641 661, AFSL 230705) (“MLC”), a member of the National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686) group of companies (“NAB Group”), 105–153 Miller Street, North Sydney 2060. An investment with MLC does not represent a deposit or liability of, and is not guaranteed by, the NAB Group. The information in this communication may constitute general advice. It has been prepared without taking account of individual objectives, financial situation or needs and because of that you should, before acting on the advice, consider the appropriateness of the advice having regard to your personal objectives, financial situation and needs. MLC believes that the information contained in this communication is correct and that any estimates, opinions, conclusions or recommendations are reasonably held or made as at the time of compilation. However, no warranty is made as to the accuracy or reliability of this information (which may change without notice). MLC relies on third parties to provide certain information and is not responsible for its accuracy, nor is MLC liable for any loss arising from a person relying on information provided by third parties. Past performance is not a reliable indicator of future performance. This information is directed to and prepared for Australian residents only. MLC may use the services of NAB Group companies where it makes good business sense to do so and will benefit customers. Amounts paid for these services are always negotiated on an arm’s length basis.