The Australian Dollar’s curious weakness against USD explained

The Australian Dollar (AUD) is one of the worst-performing currencies against the US Dollar (USD) in September, despite USD falling in most other pairs. 

The Aussie Dollar has weakened about 0.45% against the US Dollar in September so far, whilst EUR/USD, USD/JPY and GBP/USD have all risen. The Dollar Index (DXY), which measures the strength of the USD against a trade-weighted basket of currencies, is down 0.69%. 

The Aussies’ recent depreciation seems illogical given the Reserve Bank of Australia (RBA) is one of the few major central banks that is not planning to cut interest rates. In fact, in the Minutes of the RBA’s last policy meeting its officials actually said they might consider raising interest rates to combat still-stubborn inflation in Australia. 

Normally, such a stance would strengthen the Australian Dollar since higher interest rates attract more foreign capital inflows. But this has not been the case for the Aussie, especially since August 29. 

The weakness is even more puzzling given the reasons for the US Dollar’s recent decline. USD is falling because traders are pricing in considerably lower interest rates in the US. The stances of the two currencies’ central banks could not be more dissimilar. 

So, what could explain the Australian Dollar’s comparative weakness against the US Dollar? 

The answer seems to be the economic slowdown in China, which is the country’s largest trading partner as it is the destination for 35% of Australian exports, according to Commerzbank FX strategist Volkmar Baur. 

In a note about why the “antipodes” – the Australian and New Zealand Dollars – are the weakest, Baur concludes, “it seems that both are being weighed down more by weak data from China than the USD is by recession fears in the US itself,” he says. 

“A look at the export data shows why. About 35% of all Australian exports over the past 12 months went to China, while the figure for New Zealand was still around 25%. A prolonged slowdown in China is therefore likely to affect both countries – although over time it should become clear that Australia will suffer more than New Zealand,” adds the strategist.

Factor in the falling price of Iron Ore, which has reached historic lows in the $91s – and is Australia’s biggest export commodity to China – and this may explain the mystery of the Aussie’s curious weakness.