Where to for the Aussie dollar in 2016?

LAST YEAR saw the Aussie Dollar fall by around 10% from about 0.8160 at the start of the year to current levels closer to 0.7200 - providing a windfall for Australian exporters, and a headache of equal proportion for importers.

The reality is even more hard hitting when you consider the currency has actually now fallen about 35% from its April 2011 high of 1.10799!

So, where to for 2016?  After such large falls, the reality is that a lot of the bearish (or negative) news for the Aussie dollar is possibly already largely factored into the price - and it is interesting to note that over the last four months, the steep down trend has eased somewhat, leaving the currency largely range bound between roughly 0.7000 and 0.7300 (for most of the time) since September.

The key to trying to work out where the dollar might go in 2016, however, probably relies on an understanding of the underlying influences on price - and how they might come into play over the coming twelve months. The commentary below is from CargoHound's currency specialist, Pete Johnson.

 

1.) Commodity Prices: 

Iron ore futures prices have fallen from about US$65/MT (CFR China) at the start of last year to around US$42.50/MT at the moment (albeit up from mid December lows of closer to US$36/MT). That is a yearly fall of about 35% - and compares to an overall slide on the CRB Index of 24%. Thus, with an annual fall of "just" 10% for the AUD/USD it's arguable that the currency "outperformed" in 2015 based on a direct comparison. "Where to" for the iron ore price is extremely difficult to call - we are now back to levels not seen since late 2007 - but the old adage "low prices cure low prices" may be a misnomer in this case given that prior to 2005, the iron ore price had not traded above US$20/MT CFR China! Toss a coin on this one but on balance, it's hard to see commodity prices being a "positive" influence on the AUD/USD in 2016.

 

2.) Interest Rate Differentials: 

The difference in interest rates between Australia and the USA influences the relative rate of return investors can achieve in either country - and hence demand for each currency. The market expected a tightening in the interest rate differential in 2015, and it got it. The US FOMC raised official rates from 0.25 to 0.50% through 2015, whilst in Australia, the RBA lowered rates from 2.5% to 2.0%. For 2016, my money would be on a further easing in Australia of around 0.25%, while the US Fed clearly has plenty of room to tighten rates further. The reality is that with the Australian economy generally sluggish at best, and with the US recovery now well under way (and with plenty of room to move on fiscal policy) a further narrowing in the interest rate differential would appear logical - providing further weight on the Aussie Dollar.

 

3.) Technicals:

Charts are worth watching for the not insignificant reason that they are a key tool for screen based traders at the big end of town - with big money to throw at the market. Technically, the Aussie Dollar is working within a medium term 4 month uptrend within a longer term 4 1/2 year downtrend. There is strong resistance between 0.7350 and 0.7400 above the market, with trendline support coming in around 0.7150. If support at the uptrend line can be broken, then the September 2015 lows of 0.69 look like the next technical support level. We refer you back to our September blog piece for significant Fibonacci retracement levels. 

 

SUMMARY:

In summary, from a fundamental perspective it still feels as though headwinds are likely for the Australian dollar through 2016. From a technical perspective, a break above 0.7400 would signal that the long term downtrend is over, whilst a break below 0.715 (and more importantly 0.69) would suggest lower currency levels are in store.

 

WHAT CAN BE DONE: 

The reality is that currency markets are notoriously fickle, and no one has a particularly good track record of predicting them. There are various tools to hedge currency exposures including Forward Exchange Contracts that can be taken out to cover exposures as soon as your export/import contract has been negotiated.


Ian Smith

CEO at CargoHound

Ian is the CEO of online freight marketplace, CargoHound www.cargohound.com. He has extensive experience in international trade in both private and public sectors across a broad range of industries and multiple disciplines. Ian is a former Australian Trade Commissioner for the Midwest region of the United States and more recently he successfully launched an online platform called United States Connect www.unitedstatesconnect.com that provides a one-stop-shop for companies to enter the US market.


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Lina Barfoot

Lina Barfoot , Editor at SavvySME

Very interesting article!