In the first 3 months of 2020, the Australian dollar has fallen an amazing 15 cents from above 70 cents to 55. Now that it has recovered back above 60 cents, will it fall any further this year?
Surprisingly, most bank forecasts have the Australian dollar slightly higher towards the middle and back end of 2020. So while it may fall further, it could still recover by the end of the year.
Why the Australian dollar fell so much
While there are several reasons for the fall in the Australian dollar, they all have one thing in common - the coronavirus.
Some of the reasons include:
A flight to safety: This might be a term you've heard. The term refers to when money flows out of assets that are considered riskier and into assets that are considered safer. Bonds issued by the US government are considered one of the safest assets in the world. As a result, during times of uncertainty, the US dollar can appreciate as money flows into assets denominated in US dollars.
As the US dollar appreciates, it moves the AUD/USD exchange rate lower.
Falling commodity prices: One of the big fall outs of the coronavirus has been the mass lockdown of nearly a third of the worlds population. This has seen a sharp decline in the demand for commodities which has move commodity prices lower.
Australia exports a massive amount of commodities and so historically, when commodity prices fall, so does the Australian dollar. The recent fall in commodity prices has been no different.
QE: Early on in the crisis, the RBA cut interest rates to 0.25% and started a program of Quantitive Easing or QE. This program is designed to push long term interest rates down to support the economy. A side effect is that it also pressures the Australian dollar lower.