While the Australian dollar has enjoyed a months-long high against the US dollar, Market Haven senior account manager John Goldman predicts that this trend could change in the near future. At the start of the year, AUD marked a four-month high against the USD. This was mostly due to expectations that the Federal Reserve would roll out fewer interest rate hikes, which weakened the USD. In January 2023, the AUD/USD rate increased by 3 per cent, but in February, it went down by over 4 per cent. And in March, the exchange rate dropped by another 5 per cent.
Currently, the AUD/USD exchange rate is at around 0.67, which is slightly below the 0.7 range, where it peaked in August last year. Therefore, it’s looking like AUD is back on a downtrend after seeing a short break in January. John Goldman from Market Haven analyzes AUD’s performance so far to predict changes in the upcoming year.
Australia Has Floating Exchange Rate, Says RBA
Over the past year, AUD has seen constant fluctuations in prices. John Goldman notes that this was often due to global crises that had a major impact on the market. The Reserve Bank of Australia stated that the country has a floating exchange rate, so any changes in the AUD exchange rate occur due to the supply and demand of AUD in the forex market.
Inflation and interest rates are the main factors that drove AUD’s performance, but compared to the USD, it dropped at a consistent rate for a large part of 2022. Westpac data shows that the AUD/USD rate was 0.738 in March last year. It consistently decreased as it reached levels of 0.736, 0.705, 0.702, and 0.686 in April, May, June, and July, respectively. In August, it saw a minor increase, reaching 0.696, before tumbling down to 0.667 in September.
Highest Inflation Rate In Over 30 Years
John Goldman expects that for most central banks, including the Reserve Bank of Australia, key inflation data will be the main focus. Despite price pressures reducing from peak levels, the annual inflation rate has remained around 7.8 per cent, which is very high.
During its March meeting, the RBA emphasized its plan to reduce inflation, stating that it will assess how much more of an interest rate increase is needed. This is part of its stance to ensure that inflation returns to the target level of 2 to 3 percent.
While inflation is a focal point for the RBA, John Goldman of Market Haven believes that activity indicators will signal the extent to which inflationary pressure is subsiding.
Concerns of Economic Slowdown
In 2022, the persistent threat of a global recession had a major effect on weakening AUD, and it looks like this trend will continue.
The Australian economy has been able to avoid falling into a recession for almost three decades. But if inflation keeps increasing, 2023 could be the year that the streak finally ends. But even so, John Goldman predicts that as long as the economy avoids a recession for the rest of the year, there’s a chance that it will perform better in this second half.