The Australian dollar has had a horror start to the year falling to its lowest level in in over 5 years with no bottom in sight as weak iron ore prices, a resurgent US economy and a slowdown in China take its toll on the currency and the overall economy.
In early trade on Monday the Australian dollar fell as low as US80.35 cents, its lowest level since July 2009.
The price of iron ore, Australia’s biggest export fell by nearly 50% in 2014 making it one of the world’s worst performing commodities and pressuring the overall Australian economy as the country is so dependent on this vital export.
Guest Post by Andrew Masters from FiboGroup
A major reason for the decline in price has been a jump in production from Australia and other countries which have flooded the market at a time where demand is falling worldwide, which includes China the biggest buyer off the metal.
The Chinese real estate market is cooling off with not a lot of new construction on the horizon. The sector accounts for a huge proportion of Iron ore which is imported into the country from Australia.
The key to the Iron ore price in 2015 is the way China deals with the slowdown in the property market said Stan Shamu, a Melbourne-based strategist at brokerage IG
“The wildcard for the commodity’s outlook this year would be the way Beijing handled slowing growth ,with any stimulus or support for the country’s weak property market critical for a recovery in iron ore prices”.
“For now, China has a lot of supply and a lot of choice as to where they buy from and what quality they buy,” Mr Shamu said.
“I think it’ll be a while yet before we see any real game changer for iron ore.”
The US economy ended the year on a high note with improving economic conditions such as the real estate market and the unemployment rate which is at its lowest level since 2008.
Most Analysts are now predicting the US Federal Reserve will lift Interest rates this year with some saying the first move could come as early as April.
US interest rates have been on hold at record lows of 0.25% since 2008 as the FED tried to kick start the US economy after the world financial crisis.
“This is just another blow for the Australian dollar which is one in a line of many things” noted Analysts from Fibogroup forex brokers.
“With the US stock market at record highs, unemployment falling and tumbling oil prices, which will put more money into the pocket of the American consumer the FED’s hands are tied and they have no option but to move on rates”.
“We believe this will put the Australian dollar under further pressure as we enter the New Year”.
The Chinese economy has had a stellar run for the past decade but cracks are appearing which does not sit well with the Australian economy as China is Australia’s largest trading partner.
China’s manufacturing sector saw a significant decline last year which filtered through to the job market, with the unemployment rate rising, particularly in the housing market which has been a key driver of the local economy.
The Chinese government has now predicted growth to be less than 7% this year after predicting a number of 7.5% last year with further downgrades possible as we move into 2015.
In light of the disappointing figures, the Chinese government is trying to address the problem with measures such as a reduction in Interest rates to encourage banks to lend out more money and reducing red tape to allow companies to begin new projects.
These measures will be monitored closely from Australia as any Improvement can only be good for the local economy.
Share
