Turbulent commodities markets add pressure to Antipodean economies and currency markets

With the fortunes of the US and Eurozone economies something of a mixed, how is the Australian economy and currency, faring?

The Australian dollar was boosted as the Reserve Bank of Australia made the decision to keep interest rates at record lows of two percent, not making any further policy changes to devalue the Australian currency, as markets had speculated, but not ruling out any future measures, either. Improvements in commodities markets, economic developments and ongoing currency volatility in other countries across the globe have had a positive effect on the Australian dollar, which bounced up last week to the best rate against sterling for over a year. However, a further dip in oil prices subsequently caused the Australian dollar to drop to a one week low against the US dollar.

A strong Australian dollar is also bad news for Australian oil and commodities production, as a weaker dollar helps them to keep production costs down. Last month’s annual report from mining and metals company, Rio Tinto, put the severity of the situation into perspective, stating that a fluctuation of 10 percent in the Australian dollar equates to a difference of a 651 million Australian dollars-worth of earnings. While currency exchange rates are unlikely to fluctuate to that extent in the current climate, it highlights the interconnectivity of these markets and the dramatic effect that currency fluctuations can have on a business’s bottom line – any movement in exchange rates relates directly to rising or falling profit margins.

The Reserve Bank of New Zealand also kept interest rates the same, following their surprise rate slash at the start of March. Following this decision, the New Zealand dollar fell, but picked up again towards the end of March, reaching higher levels than before the rate cut.

Low oil prices create additional pressure for commodities currencies, affecting both the Australian and New Zealand dollars. With global uncertainty in the guise of low commodity prices, fiscal stimulus policies across major economies and negative equity in the US, risk averse investors tend to favour the yen and euro, causing further knock on effects on global currency markets.

The same market movements and economic developments caused the US dollar to fall further against the safe haven currency of the Japanese Yen, to its lowest level in 17 months, in answer to investor concerns about the global economy, falling commodities prices and plummeting stocks.