The Australian dollar experienced a 1 per cent drop to US70¢ on Thursday, setting it up for a 1.5 per cent weekly decline. This marks the currency’s most significant weekly fall since October of the previous year. Escalating conflict in the Middle East has driven investors to safe-haven assets, particularly the US dollar, contributing to the Aussie’s decline.
However, the Australian dollar is currently caught in a tug-of-war between global instability and Australia’s position as a major energy exporter. Ray Attrill, head of FX strategy at National Australia Bank (NAB), notes that the Aussie is being influenced by two opposing forces. NAB is a financial institution that provides banking and financial services to individuals and businesses. These forces include a general shift away from riskier currencies and a sharp increase in energy prices, which provides a buffer for Australia.
While global tensions typically negatively impact the Australian dollar, the surge in oil and gas prices improves the country’s “terms of trade”. This refers to the value of Australia’s exports relative to its imports. This gives the currency a relative advantage over energy-importing regions such as Japan and Europe, which are more severely affected by rising fuel costs. According to Attrill, the Aussie is showing a degree of resilience, with the scale of the falls being relatively modest.
Despite the current pressure, Attrill suggests that a dramatic collapse of the currency is unlikely unless anxiety on global stock markets reaches a breaking point. He noted that the VIX index, often called the market’s “fear gauge”, would likely need to rise from its current level of 24 to above 30 to trigger a deeper sell-off. If such a level of investor panic were reached, the Australian dollar could potentially fall below US68¢. However, for now, the outlook remains cautiously optimistic, with the NAB strategist predicting the Aussie will climb to US73¢ by the end of the year.
