By James Hughes Chief Market Strategist at AxiCorp Financial Services Pty Ltd
By James Hughes Chief Market Strategist at AxiCorp Financial Services Pty Ltd

Aussie Dollar playing on ‘Defence’

To use a sporting analogy, the Australian Dollar (AUD) has been playing on ‘defence’ to start 2019. In fact, the currency has kicked off the new year on the same weaker footing with which it ended 2018, with conditions in the global trading environment being less-than-conducive for higher-risk currencies such as the AUD.

First Published: e-Forex Magazine 84 / Currency Clips / January 2019

To use a sporting analogy, the Australian Dollar (AUD) has been playing on ‘defence’ to start 2019. In fact, the currency has kicked off the new year on the same weaker footing with which it ended 2018, with conditions in the global trading environment being less-than-conducive for higher-risk currencies such as the AUD. As the chart below shows, the AUDUSD rate has fallen well adrift of the highs above US$0.80 seen one year ago. The risk-aversion which has plagued markets in recent months sent the AUD below the US$0.70 level in the early going this year, before recovering back above this psychologically important level.
 
While the sharp spike lower in early January was in part due to the thinner trading liquidity over this period, it has largely been the prevailing negative market sentiment which has hurt the Aussie Dollar in recent times. A major contributor to this negative sentiment has been the concern over global growth prospects in 2019 and beyond. The scaling back of growth expectations for the global economy has seen US equities move into correction territory, which has directly impacted the trading levels of the risk-sensitive AUD. 

Chinese economic concerns as well as the ongoing US-China trade issues have also afflicted the Aussie Dollar’s performance. The AUD is hypersensitive when it comes to the Chinese economy, and this trait has created headwinds for the currency amid signs of slowing growth in the world’s second largest economy. Additionally, the cloud hanging over the state of Chinese and US trade-relations has also acted as a weight on the AUD. How this story plays out in coming months could have a large bearing on which side of the US$0.70 level the AUD spends the most time trading at. 

A further issue which has been working against the AUD has been the rising level of US interest rates. With the US Federal Reserve having raised rates four times in 2018, the Aussie Dollar has found itself on the wrong end of the yield differential versus its US counterpart. And while there is uncertainty about how active the Federal Reserve will be with raising interest rates in 2019, the sluggish nature of the Australian economy means the RBA could remain in ‘wait and see’ mode for the foreseeable future regarding the benchmark lending rate. 

Overall, it is the continued uncertainty over these key market themes outlined above which has put the AUD on the backfoot, with traders preferring to seek out traditional safe-haven currencies such as the USD, Swiss Franc and Yen instead. But while the momentum has been heading south for the Aussie Dollar over the last 12 months (as evidenced by the chart), if we do see a turnaround in broader market sentiment (spurred perhaps by a favourable outcome regarding the US-China trade relations, or a winding back of US interest rate expectations) this could be the catalyst for the AUD to begin clawing back some ground against the greenback.