The year started poorly for the Australian dollar with it finding itself 12% lower than where it was a year ago trading against the US dollar. Trading at its lowest in the last half a decade during the early weeks of January 2016, every Australian dollar was only worth US$0.68. Will the Australian dollar head even lower in 2016 is the question in the mind of most people.
Since then the Australian dollar has begun to see a resurgence of bullish momentum in the following weeks which some might see as a possible rebound. However this recent upward move could simply be a momentary respite easing the way for further downward movement. This can be determined by examining the health of the Australian economy.
The pillar of the Australian economy is largely dependent on its export market. The main bulk of Australia’s top exports consist of iron ore, mineral fuels such as coal, petroleum gas and crude petroleum as well as gold. In addition, the Australian economy has traditionally been strongly tied to China through its commodities export to the Asian giant. Accounting for 27% of total Australian exports, the voracious Chinese economy is Australia’s largest export market followed by Japan.
In recent years, China’s economy has weakened substantially with it recording its lowest annual economic growth rate of 6.9% in 2015, nearing numbers not seen since the Asian economic crisis in 2008. This has resulted in an overall decline of Australian exports figures, falling 13% from 2014 to the end of 2015.
The commodity market has also come under severe pressure in the past years with the price of iron ore printing a steep 38% drop from prices seen just last year in 2015. While oil prices has fallen to a third of its price in 2014 and is recently still hovering around US$30 a barrel despite talks by OPEC members to freeze oil outputs.
In all, unless there is a stronger buoyancy in the commodity markets, or a strengthening of the Chinese economy or both, Australia seems set on the slippery slope of continued economic weakening translating to an even weaker Australian dollar. However it is not all doom and gloom as countries in the Asia Pacific region are likely to experience similar slowdown in their economies.