Risk aversion has driven the AUD lower

10.10.2018 Export Finance Australia

In Efic’s latest economic update – the AUD and potential impact on exporter outlook.

The Australian dollar has fallen 5% against the USD in 2018 on the back of higher US interest rates, growing investor risk aversion (which sees investors favour safe haven assets like the USD), and the dip in prices for Australia’s key commodity exports. But untangling which of these forces is primarily responsible is difficult given that they are interrelated. US interest rates and investor risk aversion also influence commodity prices and Australia’s interest rate differential with the US.

One way to assess the importance of these changes is by looking at counterfactual scenarios.

  1. What if the US Federal Reserve had kept rates unchanged in 2018 and investor risk aversion (proxied by capital outflows from emerging markets) had remained low?
  2. What if investor risk aversion remained low despite higher US interest rates?
Our modelling, which accounts for the ‘spaghetti bowl’ of forces impacting on the AUD, suggests under the first scenario the AUD would still be around US$0.79. Under the second it would be closer to US$0.77. This compares to the US$0.73 recorded in August, suggesting that investor risk aversion has been responsible for majority of the fall in the AUD (Chart). The weaker AUD has provided a tailwind for Australia’s exporters, but growing risks to global growth from the threat of a trade war and higher investor risk aversion still challenge the export outlook.

Other stories in the latest edition of World Risk Developments:

  • China—Trade war complicates economic rebalancing
  • India—Strong headline growth masks economic vulnerabilities
  • South Africa—Recession and populism renew downgrade fears
  • Argentina—Austere budget should bring forward IMF support
  • Pork exports—Swine flu could lift Australian pork exports
Sign up now to receive the next edition.
Get Regular Updates