Audsiders? Why Australian dollar has been decreasing throughout this year

The Australian dollar has shown consistently negative dynamics in relation to the USD this year, with a drop of nearly 7% over the course of nine months. But what's behind the AUD's apparent weakness and vulnerability? Let’s find the answers in this piece.

Firstly, we can illustrate the previously mentioned trends in the AUDUSD pair for 2023 on a chart. The chart shows that at the beginning of the year, the Australian dollar was supported by the expectations of an imminent interest rate decrease by the Federal Reserve. However, it didn’t happen, and those expectations vanished.

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When we expand our focus on the chart and examine the last three months, it becomes evident that the decline has only gained momentum. 

The underlying drivers behind this trend may not be too elusive. The Reserve Bank of Australia has held the interest rate steady for four months in a row without signaling a hawkish stance. Simultaneously, the inflation in Australia continues to increase.

The other critical factor for the Australian currency and economy is the situation in China. This large market still hasn’t been able to recover from the repercussions of the pandemic. The Chinese property sector is facing a severe crisis, and when your leading trading partner is in trouble, it inevitably affects you. That’s what is happening with Australia now. 

In contrast, the US currency and economy are performing robustly. US Treasury bond yields have reached their peaks, the economy turned out to be stronger than expected, and the Fed isn’t going to raise the interest rate yet. This contrast is what allows the USD to outperform the AUD by such a significant margin.

And it is unlikely that the situation will change in the foreseeable future. However, time may work in favor of the Australian dollar. It might not receive support in the immediate future, but the US dollar could weaken in 2024. The Federal Reserve will eventually need to initiate a cycle of interest rate reductions, and economic challenges may also catch up with the U.S.

In other words, we can wait for shifts in the AUDUSD next year. Nevertheless, it's worth remembering that the modern world evolves rapidly, which is why conducting your own analysis before making any trades is advisable.