Key drivers of the Aussie

See the latest Australian dollar analysis here:

Macro Morning

What drives the AUD/USD exchange rate?

You would think that it’s a question that is fairly easy to answer yet conventional currency forecasters still have difficulty get their point forecasts right.

I’m not making excuses for these guys and gals in the punditry but I’ve always thought that there was a little bit of an “corrected”  Heisenberg Principle at work here. That is, by observing, forecasting/building expectations and publicising them, we impact the end point. It’s one reason when I was doing the currency strategy thing I had price targets only. Trying to nail a price and time target is almost impossible once we get past about 3 months and anyway Heisenberg said we can’t know both velocity and position so its a moot point.

But back to the main reason for this blog. Their are a myriad of inputs for any currency but in general you can distil them into 4 or 5 key drivers. In the case of the AUD/USD rate the main drivers, both up and down are:

a.       Global Growth and Commodity prices

b.      Domestic growth and Interest rates

c.       Global Risk Appetite/Aversion

d.      Techincals and

e.      The USD – the other side of the coin.

Which is the key or primary driver and how you weight these drivers changes both depending on conditions but also is directly related to the time frame being looked at. But in general this is all you need to know whether Day trading or hedging a corporate balance sheet.

Now of course some readers, and certainly professional FX advisors and pundits may say there is more to it than that. But believe it or not less is more.

James Montier in his “Little book of Behavioural Investing” shows us research that proves that more information doesn’t necessarily improve accuracy, just confidence. Sounds like market forecasters to me.

Over the next 5 Blogs we will spend some time examining these drivers in more detail and build a framework for evaluating what’s driving the AUD.

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  1. Only thing I is that this parity is killing my business (business service to US based customers ).I was pretty profitable at 0.6, I have had to do some nasty “optimization” lately because of the parity.

    I cannot see it as sustainable, we will have nothing else but empty holes soon.What a shame.

  2. You could boil it down to the demand relativities for the USD and AUD. At the moment the AUD is in high demand because of (1) high (by world standards) AUD interest rates and (2) high demand for commodities which Australia produces, which ultimately have to be paid for in AUD. The USD is in low demand relatively because of extremely low USD interest rates and a large supply of USD due to QE.

    • I worked for Australia’s largest Exporter.

      Nearly all major long term purchase contracts to do with mining are in USD and paid in USD, mining companies exchange a small amount into AUD for Australian wages and taxes, Keep some in USD to purchase large machinery, pay for shipping etc, and exchange the rest to Yen to send to head office.

      I dont think the mining sector really adds stability to the AUD. There is no incentive for any major exporter or any other country to support the AUD in a freefall. Remember 2008 no one came to Australia’s rescue and no one will the next time.

      Australia’s mining exports has dropped from a 9 billion per month peak in mid 2010 by 2 billion a month, which has not been reflected in the AUD.

      • Interesting comments, Robert. I was aware that long term contracts were usually in USD, but I thought it was more than a small amount that had to be converted to AUD for taxes etc. BHP paid $4.7b in taxes to Australian governments last year. This year’s bill will presumably be about double that, not including the new tax. While this is small compared to their turnover, it is not insignificant compared to their profit.

        On your other point, do you know why the big miners are so keen on holding profits in Yen? Presumably they are not impressed with the outlook for the USD.

        I’m sure you are right about nobody being particularly concerned about protecting the AUD (except the Reserve Bank, presumably). I imagine the RB will have been busy buying foreign currency while the Aussie is high, so that they can use it to slow the fall when it comes.