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Australian Dollar Forecast: Will AUD Recover?

By Will Ellis
Last Updated on January 29, 2024

Generally speaking, the Australian Dollar (AUD) — better known as the Aussie dollar — has been going through a relatively tough time since 2013, as despite some brief recovery in 2016, the currency has been on a steady downward trajectory for over 10 years.

Now, it’s not particularly easy to name one single reason for this kind of decline, as there are a massive amount of factors that play a role here — whether it’s the broader Australian economy, current global crises, the prices of certain commodities, and even the impact that the pandemic had on the value of the Aussie dollar.

So, to figure out why the AUD dropped approximately 25% in value from its peak in April 2013 to today in January 2014, we’re going to be breaking down a few of the main factors that have an influence on its trajectory throughout this article.

Table of Contents:

The Australian Dollar Exchange Rate and Its Dynamics ➡️

To kick things off, it’s worth exploring what kind of impact the Australian Dollar exchange rate has on the overall value of this currency since that’s the dynamic that reflects how valuable it is against other kinds of major currencies — most notably the US Dollar (USD).

In general, aside from being a fairly pivotal metric, the exchange rate is actually influenced by a range of different factors, ranging from things like domestic economic conditions to broader global market trends.

It’s also worth mentioning that AUD operates on something known as a floating exchange rate system, which essentially means that its value gets determined by different kinds of market forces — responding to whatever the current supply and demand dynamics are across foreign exchange (Forex) markets. Because of this, AUD generally has a decent amount of flexibility, which allows it to adjust to changing economic conditions fairly quickly.

Trading AUD on Forex Platforms 💰️

We’ll be mentioning the Forex markets fairly frequently throughout the article, so let’s break down what these platforms actually are in a bit more detail before going any further.

In essence, Forex platforms are a service that enables you to exchange your Aussie Dollars for US Dollars, Euros, or any other type of currency you might need for either your international adventures or simply just for making money — both of which make these markets fairly useful.

Why Does Forex Exist?

Given that it’s one of the most common trading pairs in Forex markets, say, for instance, you wanted to plan a trip from Australia to the United States — whether it’s for business or for pleasure — you’re most likely going to need some amount of US Dollars to spend while you’re over there.

As such, the foreign exchange market gives you an opportunity to exchange any currency you like for another, allowing you to get the currency you need for your trip with very little wait time.

How Does Forex Work?

In essence, the Forex market is made up of a range of financial institutions, corporations, and even your average retail trader, and you’re all interacting with each other.

Given the disparity in capital that inexperienced retail traders can have against major banks and hedge funds, it naturally makes the latter two the primary players in this market, being the entities that trade the most currency every day.

So, if you’re trading and you think the Aussie Dollar is going to strengthen against the US Dollar, you might buy AUD/USD with the hope of selling it later at a higher price. On the flip side, if you believe the Aussie Dollar will weaken, you’re probably going to do the opposite and sell your AUD/USD so that you can possibly buy it back at a lower price.

Leverage and Risk Management

To wrap this particular topic up, it’s worth mentioning the term “leverage” briefly if there are any slightly less experienced traders reading this article, as this is something that you’re likely to see when using trading platforms.

In essence, this is a way of being able to control a potentially massive trading position with a relatively small amount of capital, which, while sounding like you’ve hit the jackpot at first, is actually something that comes with massive repercussions.

Although it’s a way of amplifying your potential profits, it works exactly the same on the inverse and your risk of significant losses is multiplied. As a result, it’s absolutely paramount to have a firm understanding of why risk management plays a major role in Forex trading before you decide to fully commit and invest your money.

There are plenty of trading strategies and educational resources available to learn from, but setting stop-loss orders — a tool available on most trading platforms that automatically closes your trade when a set level is reached — is a good starter tip.

The Reserve Bank and Its Role ➡️

Next up, let’s take a look at what kind of influence the Reserve Bank of Australia (RBA) has on the Australian Dollar’s value since they’re normally able to play a role in various interest rates through their monetary policy decisions — something that’s generally a critical determinant across Forex markets.

In relatively simple terms, interest rates are one of the few things that actually tends to have a direct correlation with however the Aussie Dollar is currently performing, so when the Reserve Bank decides it wants to adjust interest rates, this is something that’s often going to have an influence on the wider investor sentiment — subsequently affecting the exchange rate.

Fortunately, higher interest rates usually mean an increase in the foreign capital being traded for AUD, so this is one of the ways demand for the Australian Dollar is increased, along with its value.

Global Influences on the Aussie Dollar

Moving forward, it’s important to understand what kind of impact factors from around the world can have on the Australian Dollar’s value, as it’s definitely not something that’s only influenced by national policies and whatever actions the Reserve Bank of Australia is taking.

In reality, a pretty wide selection of global crises that are currently occurring — whether that’s geopolitical tensions and war across Europe and the Middle East or any broader economic recessions — have the potential of sending ripples through the foreign exchange market, affecting the exchange rates and the value of pretty much all major currencies, including, of course, the Aussie Dollar.

While there are plenty of different currencies out there, that might play some kind of role in the Australian Dollar’s standing — like the value of the Great British Pound, for instance — none of them has an impact like the US Dollar since its exchange rate is generally looked at like a barometer for global economic health at large.

As such, this means that any kind of fluctuations in the US Dollar can usually have a cascading effect on all major currencies across the world, meaning you’re going to need to have a pretty solid understanding of the USD forecast if you want to predict the trajectory of the Aussie Dollar with any kind of accuracy.

Commodity Prices and the Australian Economy 🇦🇺️

Similar to most other major currencies, the strength of Australia’s economy normally has a pretty strong connection to the current prices of exports, namely certain commodities.

There are a few different factors that can influence how much a particular commodity is in demand across the world — usually driven by certain industrial activities or even infrastructure development — but regardless of the reason, it’s usually something that can have a pretty significant impact on Australia’s terms of trade and, consequently, the Australian Dollar’s value.

Iron Ore Prices and the Aussie Dollar

To be specific, Australia is actually one of the world’s leading exporters when it comes to iron ore, so this means Australia’s economic health is pretty closely tied to however much this particular commodity is in demand around the world. Moreover, the price of iron ore itself is usually influenced by demand from major economies, with China being one of the main players here.

Fortunately for the Australian economy, the price of iron ore has been on a steady rise since around 2015 — mostly due to a constant need for it for various kinds of infrastructure projects and industrial activities — so this is definitely one of the main factors being the AUD’s resilience.

Having said this, this kind of symbiotic relationship that the Aussie Dollar generally has with iron ore prices isn’t entirely risk-free, as the same kind of relationship works in reverse — meaning that any kind of downturn in iron ore prices, for whatever reason, could pose a few potential challenges for the Australian economy.

As such, it can always help to keep an eye on iron ore prices — as well as the commodity market in general — whenever you’re trying to forecast how the AUD to USD exchange rate might look in the near future.

The Impact of the Federal Reserve and Global Recession ➡️

Going back to the earlier point regarding the amount of influence that the US can have on global economics, it’s also worth mentioning what kind of impacts US Federal Reserve policies can have.

Aside from the Reserve Bank of Australia, the Federal Reserve’s stance on a range of different monetary policies can change the current USD exchange rate — subsequently affecting the Australian Dollar due to how many other currencies are tied to the exchange rates of the United States Dollar.

Moreover, the general possibility of a global recession has certainly not been helped by the recent pandemic, essentially pausing the global economy (including Australia’s iron ore exports), among a range of other ongoing factors.

As such, the Australian Dollar’s performance is definitely not untouchable in a broader economic context, so any uncertainties surrounding a potential global recession can cast a slight shadow on the AUD forecast in general.

The Role of Interest Rates in Shaping the Aussie Dollar Forecast

The Aussie Dollar’s Resilience Amid Ongoing Global Crises

To wrap things up, despite there being plenty of uncertainties as to what 2024 might have in store for the Australian Dollar, it goes without saying that it’s shown a pretty high amount of resilience anyway — especially in the context of all the various ongoing global crises affecting major currencies around the world.

Even after major economic destabilisers such as the Coronavirus pandemic, the Aussie Dollar isn’t a million miles away from its all time high in 2013, and sudden peaks in its value (as we saw as recently as 2022) show that there is plenty of hope for the currency to reach new highs in the near future — whether that’s down to how resource-rich Australia is in general or simply just via strong economic management.

Having said that, whether it’s down to certain domestic policies or just global economic dynamics at large, the road ahead is definitely not without any further challenges, so just try to be as vigilant as possible if you’re looking to either buy or sell AUD any time soon.

FAQs 📢️

How Do Currency Markets Operate?

Whether you’re trying to buy Australian dollars or Japanese yen, currency markets — similar to cryptocurrency — operate 24 hours a day, but only for five days a week.

The Forex market is actually decentralised, so you’ve got to rely on some kind of online trading platform if you want to engage in this market — just beware that each platform will have its own exchange rates that are usually determined by things like market sentiment or even just basic supply and demand dynamics.

Why Is Currency Trading Important?

Naturally, the ability to trade various kinds of currencies is something that’s pretty vital when you’re trying to conduct business internationally, since this is how you’re actually able to buy or sell goods and services across borders.

Your average retail investor can get involved with these markets simply to diversify their portfolio and make a nice return, but a lot of central banks like to participate in the currency markets, too, so they can stabilise and manage their own domestic currencies.

What Sort of Risks Are Associated With Currency Markets?

Generally speaking, currency markets tend to come with a decent amount of risk, whether that’s because of exchange rate volatility, geopolitical uncertainties, or even just economic instability — all of which can have an even worse impact if you’re a relatively inexperienced trader with less insight into technical analysis or strong risk management strategies. Just make sure you’re staying in the loop if you ever want to engage in these markets.

How Can Businesses Manage Currency Risk?

If you’re a business owner who conducts most of their business overseas, you’re going to want to employ a few different risk management strategies in order to manage your exposure.

To name a few, consider hedging some of your investments through financial instruments like forward contracts or options — you can also try to diversify your suppliers and customer bases so you’re able to conduct a bit more business locally as a backup option.

What Is a Carry Trade In Currency Markets?

Put simply, carry trading is basically where you borrow currencies with a fairly low interest rate so that you can invest in a higher-yielding one, ultimately with the aim of profiting from whatever the interest rate differential is.

Now, while it’s a potentially lucrative strategy, sudden fluctuations in exchange rates — which are known to happen quite a lot in these markets — can make them fairly risky, so try to manage your exposure before going all in to one trade.

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