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What’s in Store for the Australian Dollar in 2016?

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Dec. 30 2015, Published 11:19 a.m. ET

Australian dollar shares the fate of commodities

The Australia dollar is heavily linked to the commodity prices and the Chinese economy, which is the major source of demand for Australian exports. Iron ore, which is the major export commodity of Australia, had taken a beating in 2015 and is expected to continue the downtrend in 2016. A further fall in demand from China and a drop in commodity prices might see the Australian dollar test 0.69 levels on the downside. The diverging monetary policy between Australia and the US may add further pressure to the currency pair as the Australian Central Bank is planning to cut rates to spur growth while the US Fed’s dot plot chart indicates further hikes in 2016.

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Macro indicators are mixed with a slight negative bias

The major driver for any currency pair is the trade balance figure. It has proven to be a major problem for Australia as the trade balance had gone below eight-year lows, finding it hard to bounce back. The increase in spending by the government will put further pressure on the trade balance. While most of the indicators are negative, the few positive ones include the strong employment figures, which saw a surprising rise in the latest reading.

Impact on the market

Through the year from January 2, 2015, to December 28, Australian ETFs have been trading on a negative note. The iShares MSCI Pacific ex Japan ETF (EPP) fell by 13.1%. The iShares MSCI Australia ETF (EWA) also ended lower by 15.4%.

The Australian ADRs (American depositary receipts) trading in US markets continued the negative spiral. BHP Billiton (BHP) fell by 42.7%. In the mining sector, British-Australian multinational Rio Tinto (RIO) fell by 35.7% while Australian banking ADR Westpac Banking (WBK) ended lower by 12.4%.

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