Aussie dollar at six-year low | Heading for Global Financial Crisis level against the USD

After two cuts in the core interest rate by the Reserve Bank of Australia, the Aussie dollar is now heading almost inexorably for its next support, which is marked by the level to which it fell in the immediate aftermath of the global financial crisis in 2008 / 2009.

After being shored up for years on the back of hard commodity exports, mainly Iron Ore, to China, the currency is now suffering the effects of a slowdown in the world’s second largest economy, and the consequent reduction in imports from all sources, but most especially from the supplier that is geographically most advantaged when times are good.

The interest rate cuts, with perhaps more to come, are merely a necessary response by the RBA to the slowing Australian economy, but they are nevertheless the trigger for the unwinding of the carry trade, where investors borrow in low-interest rate jurisdictions so that they can invest where rates are higher – up to recently this meant investment in Australia.

Heading for Global Financial Crisis level against the USD

The most recent nail in the coffin for the Aussie was the release, yesterday morning GMT time, of the Australian Bureau of Statistics (ABS) figures for quarterly Gross Domestic Product (GDP). These show that, in seasonally and inflation (so-called ‘chain-value volumes’) adjusted numbers, the economy only managed to grow 0.2% in the period. According to the ABS, reduced mining and construction activity, coupled with a decline in exports, were the main drivers of this.

One optimistic note was the report that a positive contribution to GDP came from domestic final demand components of household and government consumption. This is some good news after the authorities’ stated desire to move economic growth drivers from those that accrue from exports to those that are based on domestic consumption.