The Australian Dollar: A Journey Through Time and Trade

The U.S. dollar, Japanese yen, British pound, and Swiss franc, and Euro make up the 5 “major currency” pairs. Given that the Australian Dollar (AUD) was the 6th most traded currency in 2022, it arguably deserves a spot in this elite group.

The Australian Dollar became a serious currency during the commodity and pricing boom of the late 2000s. China’s manufacturing boom, met with Australia’s mineral-rich economy, led to a surge in AUD trading volume, where it hit its peak in 2010. Currently the AUD doesn’t have any clear trend against other currencies and AUD exchange rate fluctuations are mostly derived from major appreciation or depreciation in value of other currencies.

Current Australian Dollar Rates

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The Birth and Evolution of the Australian Dollar

Before the Australian Dollar became an official currency in 1966, Australians used an Australian Pound. This currency, which was coming off the back of the British sterling, was used since the 19th century.

We currently think of currency as a simple decimal – a product can cost $4.99 or $5.71. However, the British sterling during this time, and thus the Australian pound, was not using a decimal system. There were 12 pennies in a shilling, and 20 shillings in a pound. For obvious reasons, this is a poor system for an advanced economy, and it was the main thrust behind Australia’s decimalisation towards having its own currency.

1966 – A Need for a New Era

1966 marked a new era towards replacing the British shilling and pound system, opting for a 100 cents per dollar system.

 The need is obvious; transactions can become streamlined in a modernised financial system, with quicker calculations and aligning in sync with other major economies that had already moved to decimalisation.

1983 – Floating Dollar

Before 1983, the AUD was pegged to a fixed rate. Originally the British pound and later the US dollar, the currency was fixed until 1983. The decision to float the currency meant that it would now become subject fully to its own demand and supply, making its own economy more flexible and adaptable to economic changes.

1988 – Polymer Prints

In a bid to curb counterfeiting and enhance the longevity of banknotes, Australia became the first country to have polymer banknotes in 1988. This substance made them more resistant to wear and tear. Many countries have followed in Australia’s footsteps ever since.

2001-2011- From Dot-com Bubble to Parity

The Dot-com bubble, which attracted speculative investors from around the world, mostly drove up the value of US tech stocks. This drove up the demand for the USD, to the point where it essentially cost 2 AUD to buy 1 USD. 

In the aftermath of the bubble bursting, the AUD strengthened consistently for a decade until eventually reaching parity. As mentioned earlier, this was in part due to China’s growth met with Australia’s natural resources surging in demand. 

Whilst the US, UK, and most of the world fell into recession in 2008, Australia did not. The recovery plan for these countries was to use low-interest rates and quantitative easing to boost growth. Given that Australia didn’t need to, they had an interest rate differential that was preferable to savers and bondholders.

The Australian Dollar on the Global Stage

Currency pairings are a quick and easy way to gauge the strength of one currency to another. Sometimes this represents how one economy is faring better than another, though it’s not always as simple as that.

When using it as an economic barometer, the AUD/USD stands out. Not just for those interested in the news, but for traders and businesses. Speculators, foreign investments, and international trade are all impacted.

The strong relations that Australia has with both the UK and Europe means that AUD/GBP and AUD/EUR are also significant, though the latter has a lot higher trading volumes. Generally, it is expats and small businesses that drive the trade with the UK, and the same goes for AUD/NZD.

AUD/JPY is important because not only is the JPY a crucial major currency, it’s also a relatively close trading partner. 

Factors Influencing the AUD’s Strength

The influences on the AUD are much like any other currency: Interest rates, geopolitical events, and business cycles are all at play. Commodities, however, play a particularly important role in the AUD where iron ore, gold, and coal are highly important exports for the global supply. 

The Reserve Bank of Australia also plays a big role. Whilst it didn’t succumb to 0% interest rates for as long as much of the west did post-2008, it did eventually be pushed close during covid. However, this was short-lived, and Australia’s fiscal strength – with a lot of cash reserves from historical consistent growth – has meant the reserve bank has been less extreme in its policymaking.

Recent Trends: A Closer Look at the Last Year

Throughout Australia’s winter, the Australian dollar has been falling. Whilst it is falling against most currencies, its significant drop against the dollar is partly because of the US’ economic strength in 2023, which impressed with robust labour markets and a bullish S&P 500. 

The expectation of higher US interest rates, which are already higher than the RBA’s, is another reason. However, China’s weak economic rebound ever since Covid is hurting Australia (as stated by the RBA themselves), as they are a major trading partner. China accounts for almost a third of all Australian exports, with Japan a not-so-close second.

Furthermore, a lot of commodity trades are USD denominated, even when they’re Australian exports. This means that the relationship between commodity prices and the AUD has become less reliable, whilst it might be the performance and growth of China’s top companies that better influence the Australian dollar.

The Australian Dollar: What Lies Ahead?

China is playing a big role in the Australian dollar, and things aren’t looking optimistic, with Barclay’s recently cutting China’s growth forecast. Furthermore, the Fed in the US claims that further hikes are possible, whilst the Bank of England and European Central Bank retain high rates with scope for more increases. This is all bad news for the Australian Dollar.

ANZ “mildly underweight” the AUD, suggesting that the USD is past its peak, with fiscal positions and current account balances set to play a larger role. Meanwhile, Westpac believes the AUD will strengthen to 0.77 to the US dollar by the end of 2024.

The world hasn’t been short on vast global events in the past few years, and the same may be true heading into 2024. The war in Ukraine, for example, has a large impact on the energy and commodity markets, which impacts both rates and Australia’s exports. 

However, China’s tensions with Taiwan could spell trouble for the Australian Dollar, as it would heighten the risk for, at minimum, sanctions on China. And, at worst, not just war but a severe global shortage in semiconductor chips. In the latter example, safe-haven currencies become important, but the USD or the AUD may be one, as both are closely impacted.

Correlations

The AUD is heavily correlated with other currencies.
View this informative heatmap showing the AUD correlation with other majors:

Conclusion

The Australian Dollar is enduring headwinds right now, but so is the local economy. US growth is around double the rate of Australia, and whilst that stays true, the AUD is in trouble. For stakeholders of the Australian dollar – its businesses, investors, international workers, and even its consumers – it’s important to stay on top of trends in order to better contextualise the price of goods and commodities.