Turmoil in emerging markets is proving to be a source of support for the Australian economy, as traders take the well-trodden path of selling the Australian currency to reflect heightened risk aversion.
The Australian dollar is hovering around a 20-month low against the US dollar, trading around US72¢, a drop of 7.5 per cent so far this year, even as the Australian economy shows solid progress.
“Normally you would need wages or consumer price inflation to disappoint [for the currency] to be at these levels,” TD Securities chief Asia-Pacific macro strategist Annette Beacher said. “Second-quarter GDP is going to be very solid.” Gross domestic product data is due on Wednesday.
For now, the Australian dollar is doing its bit to support Australia’s small, open economy. Trade figures out Tuesday showed goods export volumes lifted 1 per cent and services exports 1.2 per cent in the June quarter.
“A lower Australian dollar is positive for growth. When it drops and stays lower for longer, that’s when the benefits come through,” Commonwealth Bank economist Gareth Aird noted.
The Reserve Bank of Australia commented on the currency’s weakness against the US dollar in its decision to keep rates on hold at 1.5 per cent on Tuesday for the 25th month in a row.
“The Australian dollar remains within the range that it has been in over the past two years on a trade-weighted basis, but it has depreciated against the US dollar along with most other currencies,” RBA governor Philip Lowe said in the policy statement.
Along with emerging market worries, other sources of pressure on the Australian dollar include a wide and growing gap between Australian and US interest rates, and an ongoing trade war between the US and China.
A slightly bigger-than-expected decline in China’s Caixin manufacturing PMI in August on Monday suggested Chinese growth continues to slow.
Given those factors, strategists aren’t expecting the Australian dollar to strengthen any time soon, which may continue to shore up the Australian economy.
“It is hard to get too excited on the Australian dollar’s near-term fortunes given the imminent risk that President Trump may impose another round of tariffs on Chinese imports,” National Australia Bank senior currency strategist Rodrigo Catril noted.
Emerging markets aren’t likely to see a quick turnaround, either, as a rising US dollar curbs liquidity in the world’s financial markets. Add in some unhelpful politics and some countries in the emerging market space are battling to stem a severe slide in their currencies.
Argentina, for example, on Monday imposed an austerity program and new taxes to deal with its economic emergency that has seen the peso drop almost 50 per cent to a record low against the US dollar this year and inflation leap to 30 per cent.
Turkey’s central bank is trying to battle inflation and counter a slump in the lira and a spike in inflation – which hit 17.9 per cent in August – without formally raising its benchmark interest rate. President Recep Tayyib Erdogan believes higher interest rates fuel inflation and will kill off economic growth. The lira has dropped 20 per cent in the past month.
While currency falls are stark in Argentina and Turkey, other emerging market currencies are suffering as well.
On Friday, the Indonesian rupiah slid to its lowest level since 1998 and Indonesia’s central bank was “decisively” intervening in the foreign exchange markets on Friday according to reports. The Indian rupee was set for its biggest monthly drop in three years in August and quietly hit a fresh record low on Friday.
And Su Lin Ong at Royal Bank of Canada argued that selling the Australian dollar on emerging market concerns is justified given the risk that turmoil in these regions starts to significantly slow global growth, including in Australia.
“Leading indicators are telling us that global growth is slowing and the breadth of growth is less. That’s the emerging market linkage to the Australian dollar,” she said.