What’s driving the A$?

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After reaching a multi-year low in mid-January, the A$ has increased relatively steadily over the past two months, trading around 75–76US¢ in the last few days (xe.com).

So, why has this happened, and what does it mean? In a recent report released by the Australian Financial Review, some of the key factors that can drive the dollar and determine our terms of trade were highlighted. With higher meat exports through 2014 and 2015 ­– and an expectation for lower volumes in 2016 and 2017 – it is important to understand some of the key factors that can influence the returns generated from global markets.

Firstly, iron ore (and other commodities). As one of Australia’s largest export earners, rising iron ore prices over the past month have been one of the main contributors to the recent strength seen in the A$. Increased demand for iron ore in some key markets pushed the price of the raw commodity higher, and buyers require Australian currency to purchase the product from Australian producers and exporters – this increase in demand for A$ resulted in an appreciation.

 

Secondly, market speculators. The risk takers in currency markets, speculators are investors, both domestic and international, who buy and sell currencies and other assets in accordance with the conditions they perceive in the short and long term. The volume of cash used in these transactions is significant enough to influence the A$ (and other currencies) either upward or downward.

Thirdly, interest rates. When the cash rate set by the RBA is higher than the rate set in other economies, then the returns available on Australian financial assets become relatively attractive to foreign investors, resulting in upward pressure on the value of the A$. Alternatively, when an institution like the US Federal Reserve lifts interest rates, Australian assets lose some of their appeal, resulting in downward pressure in the A$.

There are other factors contributing to changes in the value of the A$ relative to other currencies, including, for example, the relative strength of expected economic growth in key trading partners. For a quick look at recent influences, however, the points mentioned above are among the most important.

So far in 2016, Australian red meat exports have declined 9% - totalling 220,921 tonnes swt – with beef shipments making up the majority at 149,078 tonnes swt – down 14% this year-to-date. The drop in trade is largely due to lower cattle slaughter and beef production, but the revenue the exports generate is influenced, at least in part, by the movements in the A$. Recent upward movements mean the A$ is at its highest point in the last six months, but it is still currently lower than any time between early 2009 and the beginning of 2015 – a period that included the best trading conditions for beef in years.