Australia is a small country, which means it’s sensitive to global shifts. And with its heavy dependence on trade partners like the US and China to keep the Aussie economy afloat, the value of the Australian dollar is always at risk.
Sure, on paper Australia has been doing quite well — going 26 consecutive years without a recession. We’ve reaped the rewards of a rising Australian dollar on the back of strong population growth and China’s move towards becoming a global superpower.
Commodities really do run the world…
Countries with high exports see demand rise and accumulate foreign exchange reserves. With this, their currencies rise in value.
When it comes to the value of the Aussie dollar, economist Harry Dent outlines two particular trends which have driven its exchange…
Commodity prices and interest rate differences.
Previously, it was China and its rise to a global economic superpower, as well as the commodity bubble that propelled the Australian dollar higher. It’s this same bubble that is threatening to burst, which could drag down the Australian dollar.
So with everything going on abroad — the US at boiling point, China’s decline in commodity demand, and both sides throwing down the gauntlet over trade — it’s little wonder the Australian dollar could move lower than current forecasts expect. After all, what comes up must come down.
How China’s slowdown will drag down the Australian Dollar
It’s no secret that Australia is a key commodity supplier to China. Naturally, as China’s insatiable appetite for commodities grew, so too did its demand for steel production, which requires iron ore and coking coal — all of which Australia is rich in.
This relationship, when it’s working well, is great for Australia…but like any dependence, it’s highly volatile and dangerous to the smaller and (generally) weaker party.
So when China’s growth development comes to a halt — as it’s been doing over the last year — and the need for exports from Australia falls, it will be the Australian economy and the Aussie dollar that’s in strife.
Take a look at China’s current demand for steel production, iron ore, and coking coal and compare that to the Australian dollar. The last three years saw Australia miss the global slow down by satisfying China’s demand for resources, causing the Australia dollar to reflect its strong economy.
Another threat to the Aussie dollar lies as a sort of by-product of the first two trends mentioned — that is, the slackening of Australia’s monetary policy. This, without doubt, would cause a bleak outcome for the currency.
The US Economy ripple effect on the Aussie dollar
The US Financial situation is bubbling away, and has been for 40 years, but after crucial economic policy mistakes made by the US administration, it seems things have finally reached boiling point.
The overheating risk also comes from a weak dollar, low interest rates and an inflation of price per traded share.
So what does this mean for the Australian dollar? Well, whatever is happening in the US economy creates a ripple effect on the rest of the word, including Australia.
This makes sense, as the US is the largest economy in the world going by GDP, and the US dollar is what global banks trade on.
As it stands, the biggest impacts set to drag the Aussie dollar down is China’s economic slowdown and the US overheating. In the event of this ripple, the mixture of these things — along with Australia’s own economic issues — could lead to the perfect storm: interest rates rise, global commodity price melts, and the value of the Aussie dollar plummets.
To find out more about Harry Dent’s forecast for the Aussie dollar, and how you can protect your investments or even profit from the chaos he sees coming, you can download his free research report here.
For Markets and Money