Key Insights

  • AUD index against major trading partners shows clear negative trend for currency since its peak in 2012.
  • Over the past 12 months, AUD has weakened against most major currencies, largest weakness was noted against the USD.
  • AUD weakness is also evident over the longer-term period of 3, 5 and 7 years which has benefited investors with unhedged offshore investments – growth and defensive.
  • The weakness of the AUD has been fundamentally driven – while the commodity prices have been improving, the rate differential between Australian and 2-year is at 20 year lows. This has been underpinned by weaker GDP growth, lower inflation and dovish central bank.
  • The outlook for AUD remains stable to negative against major trading partners except against Swiss Francs.
  • The case for hedging foreign currency exposure for Australian investors is weak.

Review of AUD against major trading partners – downside risks still present for AUD Index

The 1-year moving average of the real Australian dollar index highlights the continued weakness of the AUD. The index has been trending down since its peak in late 2012. The negative trend since 2012 means the currency has been declining against its major trading partners since that period. The most recent weakness is underpinned by weak domestic economic data, dovish RBA and rising geopolitical concerns and trade wars that could impact global and Chinese economic health. While the weaker AUD is positive for our export competitive and domestic financial conditions, it creates challenges for importers and overseas travellers.

Exhibit 1. The real Australian dollar index continues to face downside risks, negative recent trends underpinned by weaker fundamentals

Picture1-1 AUD weakness underpinned by soft fundamentals, the case for hedging foreign currency exposure remains weak


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