Australian Dollar Hit by a Triple Whammy

The Australian dollar on Friday (July 24) slumped to a fresh six-year low of 72.60 US cents, hit by a triple whammy of unexpectedly disappointing Chinese manufacturing data, bearish commodity prices and a strengthening US dollar.

Factory workers in China

At the time of writing, the Australian dollar is trading at 72.73 US cents.

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The preliminary Purchasing Managers’ Index, a gauge of Chinese manufacturing activity issued by Caixin Media and Markit Economics, fell to 48.24 for July, down from 49.4 the previous month. Economists expected an increase of 49.7. The index has contracted for the last five straight months, and is now at its lowest level in 15 months.

Chinese economic activity has a significant bearing on the Australian economy and the Australian dollar because China is the country’s biggest trading partner. A slowdown in manufacturing will inevitably reduce off-take of resources from Australia such as iron ore, copper and coal.

Another factor taking a toll on the Australian currency is the continuing downturn in commodity prices, particularly items in the metals and energy sectors. Iron ore, copper and coal are all down to multi-year lows in the wake of slowing global demand, particularly from China, and a glut of supplies from large capacities built up during the heyday of the commodity cycle.

Gold touched a low of US$1,079 an ounce Friday, while copper plunged over 1% to US$5,335 per tonne. A World Bank survey released Wednesday warned of lower prices in 2015 across the commodities space.

(Read our earlier article “All Main Commodities Expected To Decline in 2015: World Bank”)

Australia is a predominantly resource-based economy and the downturn in commodities has precipitated a refocus of investments out of the mining space and into other sectors such as housing and construction. During the transition the country’s budget has been adversely impacted by the commodities slump, and ratings agency Standard and Poor’s has warned that unless the budgetary deficits are controlled it might be compelled to ultimately lower Australia’s credit rating.

The third whammy to crush the Aussie is the strength in the US dollar due to expectations that the US Fed will be forced to consider interest rate “lift-off” this year in the light of strong data emerging from the US economy. On Thursday, the US Labor Department said weekly applications for unemployment benefits fell 26,000 to 255,000, the lowest level since November 1973 (that’s 42 years).

Image credits:

Title image of dollars – theaccidentalaustralian

Image of Chinese factory – expatsnews

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