Australian Dollar Outlook: AUD is still perceived as a safe currency but could begin to become more volatile as time progresses. After the downbeat GFC event, there was speculation on what the RBA would do next, and it was rumored that a rate cut was on the table. And this led to a sharp hike in the Australian Dollar, which fell after that.
Now, with stronger RBA and economic recovery, that would seem to indicate a lot more easing from the central bank. Many now believe that it will reduce rates even further, perhaps even to zero in the future. This would be a huge move, as there are very few commodities or currencies left in which to peg a rate to.
Yet, there has been no such move to shore up the dollar, only a stronger domestic economy in Australia. And so this is now being viewed as a recovery that may fade soon, as the central bank’s actions have been going well.
The RBA appears to be in the right time frame and is following the right strategy of gradual tightening for the banks. It is beginning to look as if it has been slow to act, but has now taken note of the potential risks that were previously ignored.
But there are also benefits to its actions. While the dollar may weaken slightly, this may be the right time to cut interest rates and avoid a bubble effect as it will be followed by the stronger economy in Australia which will gradually increase inflation.
So, it looks like the RBA’s actions, and the way it has handled them, will be largely positive for the dollar. While it looks like a recovery in the domestic economy is about to take place, it does raise the question of whether a weaker dollar is good for everyone. If it is not, what would that mean for other currencies?
First, we must look at and examine how the domestic economy will affect the currency at this time. The Australian dollar is mainly tied to trade and tourism. So, when there is a stronger domestic economy, which means more spending and therefore increased employment, the currency will slowly adjust, as it looks to adjust to these new spending habits.
We must also consider the effect of inflation, particularly if tourism sales go up as there is already much inflation in the United States. This may further push the dollar lower, as people from abroad begin to avoid the Australian dollar.
One final thought to ponder is what impact the weakening dollar might have on other currencies? Many would say that it would be a bad thing for the Euro, US Dollar, Japanese Yen, and Canadian Dollar.
Certainly, all of these are gaining as the result of the monetary policies of the RBA. The Japanese Yen may continue to gain as it has continued to gain from the Fed’s easy money policies. And the Euro may recover from the recent troubles of Greece.
In the US Dollar, the dollar would suffer as many areas are tightening their policies or considering a rate cut as well. In fact, just recently Janet Yellen said that we may need a “significant” one at some point.
So, it will be important to watch these currencies closely. We’ve seen that a weaker dollar can cause a drop in the price of raw materials like iron ore and coal, yet it could also be a positive if we are getting closer to deflation, as it may give us more buying power. Just be aware that the dollar may get stronger or weaker depending on the factors we see today.