Depreciation of AUD Against USD: Factors and Implications

ECONOMICS FOR PROFESSIONALS
ECON910
STUDENT ID:
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(a)The main issue highlighted in the selected article is the depreciation in AUD which has
touched a 10 year low against the USD. The article aims to indicate key factors that can
potentially account for this fall in AUD. One of these is the tepid growth in Europe
particularly Spain, Italy and Germany. Besides, the manufacturing PMI data globally has
been falling and has touched the lowest level which indicate concerns of global growth. In
this backdrop, there has been an increase in the USD demand as investors are buying US
treasury bonds to keep their money safe. Additionally, China is also experiencing a
slowdown which has had adverse price impact on key commodities. This is likely to be
detrimental for the Australian economy considering the mining based exports from
Australia. Also, it was expected that RBA (Reserve Bank of Australia) would increase the
interest rate but on account of global slowdown and slower than expected recovery of
Australian economy, the rate increase might be deferred. These three factors are leading to
depreciation of AUD against the USD (Moore, 2019).
The impact of the above factors on the exchange rate is derived through the demand supply
mechanism. As for commodities, the equilibrium exchange rate is determined by the
corresponding demand and supply of respective currency in the market. Hence, any change
which would result in higher demand of a respective currency against the other would lead to
appreciation of the currency (Barro, 2017). On the contrary, any increase in supply for a
given currency would lead to falling market value or depreciation of currency. A
demonstration of the demand supply dynamics in the scenario presented can provide an
explanation for USD appreciation. This is because globally there is a trend of increasing fund
flow into US treasury bonds leading to higher demand of USD and appreciation of same
(Dombusch, Fischer and Startz, 2016).
(b) Using the historical data from RBA, the graphical illustration of nominal exchange rate
movement of AUD in terms of USD for the last three years is represented as follows
(RBA, 2019a).

01/Mar/16
01/May/16
01/Jul/16
01/Sep/16
01/Nov/16
01/Jan/17
01/Mar/17
01/May/17
01/Jul/17
01/Sep/17
01/Nov/17
01/Jan/18
01/Mar/18
01/May/18
01/Jul/18
01/Sep/18
01/Nov/18
01/Jan/19
01/Mar/19
0.68
0.7
0.72
0.74
0.76
0.78
0.8
0.82
Exchange Rate Trend
Time
Exchange Rate (AUD/USD)
The graph above clearly highlights the stability and mild appreciation that AUD witnessed
during 2016 & 2017. This was the result of a stable economic growth that was witnessed in
Australia at that time. An enabling factor for this growth was a booming Chinese economy
which led to rise in mining exports. Owing to robust economic recovery, it was expected that
RBA would hike the cash rate by 25 bps in 2018. But this has not materialised on account of
slower than expected economic growth and deteriorating economic indicators for Australia in
the last one year (RBA, 2019b).
There are multiple factors which have led to the decline in AUD over the past one year. A
key factor is the growing concerns globally over a possible slowdown in major developed
economies particularly those belonging to Euro Zone, UK and Japan. This triggered
investment in US treasury bonds leading to higher demand of USD. Another enabling factor
of money inflow into US was the economic recovery witnessed in the US coupled with
change in stance by Federal Reserve (RBA, 2019b). Another issue which caused the AUD to
slide is the ongoing tariff war between USA and China. This has had a crippling effect on the
Chinese economy owing to which China had to deploy a massive stimulus package (Laursen,
2019). Chinese economy has direct impact on Australian economy owing to China being the
largest trading partner of Australia. Additionally, the expected rate hike from RBA has not
come through which furthered the fall in AUD against USD.