Aud Finished 2022 Strong, Will It Define Its Next Years’ Path?

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The Australian Dollar has seen a substantial recovery in the latter part of 2022, thanks partly to a rebound in commodity prices and a return of investor confidence.

As the Australian Dollar clutched its way to the top before the year ended, the U.S. Dollar has taken its steps back after a remarkable rise supported by a Federal Reserve that became aggressive in battling inflation. 

The RBA has a similar but distinct dilemma over rates, yet shares some characteristics with the Fed that could impact the AUD/USD.

As of 2023, the U.S.’s most recent year-over-year headline CPI is 7.1%, whereas Australia’s is 6.9%.

The foundational pillars of the Australian economy are as strong as they have been in years. Whether this causes an increase in the exchange rate is still up for debate.

The RBA and the Fed have given up on their plans to considerably hike interest rates in the second and third quarters of 2022. Banks feel they have given enough support, even though inflation is still high.

Since the lead-lag effects of monetary policy are widely established, the banks may want to hold off on taking any additional drastic measures to see how their current policies perform.

The Federal Open Market Committee’s (FOMC) board has unanimously agreed that rates must remain high for a while, which might weaken the USD and boost the AUD/USD.

The way the Fed framed it, however, makes it seem more likely that the U.S. Dollar will strengthen and the AUD/USD will decline in 2024.

Early in the year, concerns over the strength of the global economic recovery and a decline in demand for some of Australia’s primary commodities, notably iron ore and coal, put pressure on the AUD currency. Because these headwinds have diminished throughout the year, the Australian Dollar has been able to recoup some of its lost ground.

“Prior to the Ukraine war, Russia accounted for 0.3% of Australia’s trade despite the autocratic state being the 8th largest economy in the world. This is because Australia and Russia compete in the global economy with many of the same exports. Wheat, gold and copper would head the long list,” said Daily FX. 

An increase in commodity prices, particularly for iron ore, which is a significant export for Australia, has contributed to the currency’s rebound. The cost of this essential industrial commodity has climbed along with the rise in demand, which has helped the Australian Dollar.

The movements of the AUD/USD currency pair are primarily influenced by changes in the U.S. dollar and Fed policies. The impacts of the RBA’s tightening are already being felt locally, as exporters are paying less for Australian dollars. Positive mood and value assessments currently outweigh actual AUD purchases.

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