Aussie dollar declines – Factors that influence

I started following the Australian dollar (AUD) and tracked its exchange rate to Singapore dollar (SGD) back in March 2008. Back then the AUD/SGD rate was 1.265 (1 A$ gets 1.265 S$).

In September 2008 when the global financial crisis hit, the AUD dollar plunged to below 1 SGD dollar in October 2008. AUD/SGD declined to 0.9423 on 6 October 2008. It only began to climb from March 2009 to reach 1.2849 on 19 October 2009. Over a period of one year, Australian dollar recovered to level before the crisis.

Over next three years, the only time when Australian dollar dipped below 1.2500 was between May to September 2010. This seems to be the resistance level and it will take another economic crisis impacting Australia for AUD dollar to suffer the fate seen in 2008/2009.

Where is Aussie dollar now? As at last night (3 September 2012, 9:16 pm), AUD/SGD was 1.2770. It was declining gradually since one month ago. The peak of AUD/SGD was 1.3168 on 8 August. Since then it was downhill, a loss of 3% so far.

What is the story for this recent currency movement? The strongest reason is that China’s economic growth is slowing down and because Australia depended on China for export of iron ore and coal. With potentially weak economic growth, there is less export and capital investment inflow into Australia. Demand for Australian dollar declined as a result.

The correlation between China’s economic growth pattern and Australian dollar is in synchronisation.

As an investor, what do I hope for strengthening of Aussie dollar against Singapore dollar in the short term? First, Monetary Authority of Singapore (MAS) to weaken Singapore dollar to encourage GDP growth in Singapore. Second, there is quantitative easing (QE3) coming out from US. Capital flows to Australia for higher investment return. Third, European Central Bank (ECB) starts to purchase sovereign bonds of battled economies of Spain and Italy. This will ease pressure on these economies where debt burden is high. The global economies can sigh a relief. Lastly, there is lower inflation in Singapore. This way, MAS will have less pressure to adopt appreciation of Singapore dollar.

Copyright © 2012, limkimtong for Living Investment

The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

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