The Australian Dollar to US Dollar (AUD/USD) exchange rate tumbled to a fresh four-year low as comments made by Reserve Bank of Australia Deputy Governor Philip Lowe combined with iron ore prices falling to a five-year low.
When addressing the annual dinner of Australian Business Economists Philip Lowe said that, the Australian Dollar remained too high and warned that the currency will depreciate as terms of trade decline.
‘If the exchange rate is to play its important stabilising role, it needs to go down when the terms of trade and investment are declining, just as it went up when up the terms of trade and investment were rising. To date, as we expected, we have seen some adjustment, but if our assessment of the fundamentals is correct we would expect to see more in time,’ said Lowe in his speech.
Economists took Lowes comments as a sign that the RBA could be considering cutting interest rates in order to help stimulate the softening Australian economy. The comments contradict the sentiment expressed in the latest bank minutes, which said that the policy rate would not change in order to maintain stability.
With recent data showing, that investment in mining is set to tumble to record lows over the next four years and with commodity prices continuing to slide the outlook for the ‘Aussie’ economy is looking vulnerable.
With the ‘Aussie’ falling below the key 85 cents level the AUD/USD exchange rate is likely to see volatility increase as investors seek to pull out of the ‘Aussie’.
Iron ore declined below the $70 level for the first time in five years as abundant supply and slowing demand from China continues to weigh on prices. The commodity has fallen by 48% over the past year and as it is Australia’s most traded export the fall in prices is having a negative impact upon the wider economy. A price rise appears unlikely.
‘Iron ore certainly seems to have gone down faster than consensus. The big issue that has affected prices is the sheer rate of volume increase. I don’t think we’re going to see a significant price recovery,’ said Gavin Wendt, senior analyst at Mine Life Pty in Sydney.
The ‘Aussie’ is forecast to continue to slide against the US Dollar and other major peers as economic data out of the USA is set to bolster the ‘Greenback’.
With the Thanksgiving Holiday, rapidly approaching the sell-off of the ‘Aussie’ is likely to increase.
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