Three reasons why the Aussie dollar won’t rebound anytime soon

There is a lot riding on the fate of the Aussie dollar, but so far in 2016 the market has been rife with news that our currency is falling – and fast – as it continues to be battered by three of Australia’s most powerful influences. 

Also read: Miners and exporters drive market recovery

In fact, the Aussie dollar has depreciated by over 30% against the US dollar since mid-2011, and it shows no near sign of recovering, according to AtlasTrend.

Here are three reasons why.

Iron ore matters

As Australia’s largest export, it’s unsurprisingly that its huge price falls over the past four years has directly affected the currency.

And while Australia doesn’t just depend on iron ore for exports, many of our other major exports have also suffered major price declines.

Also read: Why the Aussie dollar won’t recover

With China transitioning to a slower growth economy versus the previous decade, it is highly unlikely we will see commodity prices close to where they were just a few years ago, AtlasTrend said in a recent report.

As a result, unless we know of another boom in Australia’s export industries around the corner, there is slim chance that the Australian dollar will be appreciating significantly anytime in the near future.

Falling interest rates

Simple economics show that countries with higher interest rates, and stable inflation, usually have stronger currencies.

During 2009-2012, Australia’s official cash rate was significantly higher than the US equivalent and while major global economies were dropping official interest rates near to zero to counter the global financial crisis, Australia was one of the only developed nations with an attractive interest rate for overseas investors.

Fast forward to today and the complete opposite factors are now at play.

Also read: There’s a lot riding on the fate of the Aussie dollar

The Reserve Bank has lowered the interest rate to a lowest-ever 1.75%, and signs suggest it could fall further, meanwhile other major developed countries are looking to raise rates as they continue to recover.

“As a result, the buyers of Australian dollar that pushed the currency above US$1.00 a few years ago are unlikely to be buyers even at the current level of US$0.73,” AtlasTrend said in a recent report.

“In fact, if the other major developed economies around the world keep delivering positive economic news, there is a good chance the Australian dollar may decline even more.”

Currencies aren’t like companies

Data from the Aussie dollar current levels between 1996 and 2007 show that it takes many years for an economy to shift gears and for the economy to recover.

While a company can change management strategy to improve performance in a short timeframe, for a country to do the same, data suggests it can take up to 5-10 years.

Also read: $A leaps on strong GDP figures

“Right now, approximately 2 to 3 years have passed since the end of the commodities boom,”AtlasTrend said.

“If history repeats itself, the Australian dollar will likely trade under US$0.80 or even under US$0.70 for some time to come until other industries are able to fill the economic gap left by the end of the commodities boom.”