Early this morning the Reserve Bank of Australia warned that the Australian economy is at a heightened risk due to the trade war between China and the US. The trade war could ultimately impact China’s economic growth, which in turn will affect Australian exports and GDP. The report echoed that of the International Monetary Fund’s earlier this week and stated that trade protectionism will ultimately limit global growth. This caused the IMF to cut its growth forecast for the first time in 2 years.
Not only is the Australian economy at risk from external factors, but domestically the stability remains at risk too. Australia is among the worst for household debt levels, so any slowdown could cause those unable to repay their debt at risk. Another risk is the cooling of the housing market down under, which has now declined for 12 months straight. Although this slowdown has been viewed as a positive by some analysts who believe it may bring financial stability, risks remain that this could cause a credit crunch if prices drop too sharply.
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This week the Australian Dollar has hit ‘rock bottom’ against the Pound and the US Dollar due to a number of factors that are weighing heavily on the AUD at present. However, a report yesterday by Lloyds Bank hinted that a recovery towards the back end of 2018 could be on the cards.
At present, the biggest factor in the Australian Dollar's demise is on the ongoing trade war between the US and China, followed by the interest rate disparity between the US and Australia, which is keeping potential investors away from the AUD and its value low.
Yesterday, President Trump launched an attack at the US Federal Reserve, blaming the aggressive rate path of the US for the global sell off of US dollars, which is likely to lead to a slowdown in the US economy and could affect global growth. Although the FED act as a separate entity, these comments should go unnoticed. The AUD could start to rise in the coming months if the AU-US interest rate differential levels out. Furthermore, if global trade tensions do start to cool, then this could create an opportunity for the AUD to recover.