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Weak commodity prices pressure the Australian economy

The Australian dollar touched its lowest level since July 2010 as tumbling commodity prices including oil put severe pressure on the commodity currency and left analysts to wonder when the rout will stop

At 9.12pm (AEDT) the Aussie dollar was trading at US84.93 US cents after falling as low as US84.17 cents and down fromUS85.02 cents at Friday’s close.

The problems began last week as OPEC, the oil cartel decided to resist pressure and leave output unchanged at 30 million barrels per day, at least 1 million above OPEC’s own estimates of demand for its oil next year, sending the oil price plummeting below the US$70 a barrel mark and dragging down commodity currencies with it such as the Aussie dollar.

Guest Post by Andrew Masters from FiboGroup

Commonwealth Bank chief currency strategist Richard Grace said the announcement sent commodity currencies tumbling.

“Increased supply of oil and mining produce, combined with slowing economic growth in China, Brazil, Russia and India as well as Japan’s recession will put oil prices and commodity currencies under further pressure” he mentioned

Another commodity pressuring the Australian dollar was gold after Swiss voters overwhelmingly rejected a proposal to increase the central bank’s gold reserves sparking a selloff in the precious metal

Australia is one of the world’s biggest gold producers coming in just behind China

Earlier in the year most Analysts were pricing in an Interest rate rise from the Reserve Bank of Australia in the second half of next year with a reduction in rates certainly not at the top of anyone’s agenda.

In a surprise move last week RBA deputy governor Philip Lowe said the cash rate could be “cut again if necessary”, a move that was previously believed to be highly unlikely and caught Investors completely off guard.

House prices are rising at the slowest pace in a year with only Sydney, Brisbane, Perth and Hobart posting an increase in November in a sign that Australia’s booming property market may be starting to cool off .

Prices in Melbourne were down 2.6% for the month while in in Adelaide, Canberra and Darwin the average drop was 0.3 per cent with Sydney bucking the trend as prices rose by 1%,

Australia’s median capital city house price stands at $559,000 with Sydney homes selling for $705,000 and Melbourne dwellings going for $568,500.

In a surprise move last week the People’s Bank of China decided to   cut the one-year benchmark lending rate by 40 basis points, marking the first reduction in two years. The bank also reduced the benchmark one-year deposit rate by 25 basis points.

The central bank’s cut in Interest rates is seen as a move to reduce borrowing costs and boost confidence amongst businesses in order for them to invest. From the outside it seems there are growing fears about a slowdown in the Chinese economy which could really pressure the Australian economy as Australia is China’s largest export partner with two way trade trade reaching $150 billion a year.

The price of iron is trading below $US70 a tonne as investors worry about an oversupply due to the slowdown in the property market in China. A big proportion of the Iron ore that China imports goes into the construction of real estate so any slowdown in the property sector is bound to affect the price of Iron ore claim analysts from Fibogroup.