AUD/USD – 2013 In Review

The Australian dollar is known for its strong volatility and taking traders on roller coaster rides, and the currency certainly didn’t disappoint in 2013. The Aussie started the year close to the 1.04 level and looked great in early January, climbing just short of the 1.06 line.

The currency lost about five cents over November-December, almost mirroring the gains made from September-October. The Australian dollar dropped to a low of 86.56 in December. AUD/USD closed the year at 0.8904, culminating a very disappointing year for the pair.

Movement of AUD/USD in 2013:

2013 Open – 1.0395 (January 1)

2013 High – 1.0598 (January 10)

2013  Low – 0.8656 (December 18)

2013 Close –  0.8904 (December 31)

Monetary Policy Decisions of the Reserve Bank of Australia:

The RBA continued to lower interest rates, continuing a trend which started back in 2011, when rates were as high as 4.75%. The year started off with rates at an even 3.0%. The RBA made a move in May, lowering rates to 2.75%. This surprised the markets, which had not expected any change. The central bank took monetary action soon after, lowering rates in August by another 0.25%, to 2.50%.

RBA Governor Glenn Stevens and other policymakers have been vocal about their concern about the high value of the Australian dollar, which they felt was impeding economic growth and hurting the fragile Australian economy. The rate cut in May was in part a response by the RBA to the high value of the Aussie, which was trading around the 1.02 level at that time. Following the rate reduction, the Australian dollar went on a steep slide which saw it fall as low as the 0.90 line. Stevens recently stated that an Australian dollar above the 0.90 level was not sustainable, and no doubt the central bank is pleased with the sharp depreciation of the Aussie as we wrap up 2013. If AUD/USD does move higher, we could see the RBA step in once again and lower interest rates, although the RBA has been reluctant to reduce rates and took such action just twice in 2013.

What to expect in 2014:

Australian GDP is expected to grow about 2.5% in 2013 and improve to 2.8% in 2014. Inflation was mostly a non-issue in 2013, as inflation stayed within the RBA’s target of 2-3%. This is expected to remain the case in 2014. If inflation does start to move away from this target, the RBA could step in and alter interest rate levels in order to keep inflation within the desired levels.

The Australian dollar, which had an awful 2013, could lose more ground, with some analysts looking at a gradual drop down to the 0.85 line in 2014. The Australian dollar continues to struggle because of weak commodity prices and the possibility of a rate cut by the RBA. As well, further QE tapers by the US Federal Reserve would give a boost to the US dollar.

Events in 2013

The quirky Australian dollar had a busy 2013, showing strong volatility and shedding  about 14% of its value over the year. The Aussie has had to contend with a weak domestic economy, decreased global demand for Australian exports and a central bank that had no qualms declaring that the currency’s value was too high.

Australia enjoyed a mining boom over the past decade, fuelled by a seemingly unlimited appetite for energy and raw materials from China, the country’s biggest trading partner. However, slower growth from China has meant less demand for coal and iron ore, Australia’s two biggest exports. The mining bust means that the economy is going through a painful transition in which other sectors of the economy will be under pressure to provide economic growth.

In the US, the Federal Reserve announced in December it would begin tapering its QE program by $10 billion a month, commencing in January. This will reduce the Fed’s asset purchases to $75 billion every month, comprised of $40 billion in Treasuries and $35 billion in mortgage bonds. The announcement came as somewhat of a surprise, as most analysts had expected the Fed to hold off on any QE reductions until early next year.

In its dramatic tapering announcement, the Federal Reserve was careful to separate tapering from rate hike expectations. Fed chairman Bernard Bernanke stated that interest rates are likely to remain low even after the unemployment rate drops below 6.5%. Previously, the Fed had stated that it would start to consider rate increases when unemployment fell below this level. Bottom line? With the US unemployment rate at 7.0%, it could be a while before we see higher interest rates in the US.

Earlier in the year, Republicans and Democrats held the government hostage and played a dangerous game of brinkmanship that almost resulted in a sovereign default by the United States for the first time in its history. After weeks of finger pointing and political brinkmanship, Congress finally got its act together and voted to fund the government and raise the debt ceiling. The shutdown, which lasted for over two weeks and temporarily threw hundreds of thousand of federal employees out of work, is estimated to have cost the economy $24 billion. The cost of the debt crisis is harder to quantify, but has certainly eroded faith in the US economy. This was underscored by a warning from Fitch Ratings, when the agency put US debt on a negative watch. Fitch stated that the crisis had cast doubt over the credit of the United States and had undermined confidence “in the role of the US dollar as the pre-eminent global reserve currency”. The Republicans were the losers in this episode, as they failed to obtain any concessions regarding the Obama Health Care Act and were blamed by most of the public for precipitating an unnecessary political and fiscal crisis.

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