AUD has been a darling currency for Malaysians for straightforward reasons that it offers a high yield and Australia has traditionally been a migration and education paradise for a lot of our fellow Malaysians.
In the past six years, the currency benefited from the rise of China which boosted the demand for commodities. Australia has been a prime exporter of commodities and its growth during the period accelerated as a result of the rising emerging markets. AUD strengthened in tandem with the glittering rconomy.
Being a high-yielding currency, AUD has been a popular target of Yen carry traders. These traders take advantage of the yield differentials between Yen and AUD. In the present crisis, AUD is the worst-affected currency as the carry traders turned risk-averse.
Looking ahead in the wake of the turmoil, the world is set to stagger down the road into a recession. As a commodity exporter, this bodes ill for Australia as the world demand turns soft.
AUD's high yield is going to subject the currency to more vulnerable downtrend. On the other hand, low-yielding currency like USD is relatively less in downside risk.
The logic of it is that in the event of recession, Australia has plenty of room to loosen its monetary policy which would be at the expense of AUD's exchange rate in relation to other currencies.
AUD's outlook is therefore gloomy. The present retracement has hardly bottomed out.
The picture shows Australian Prime Minister Kevin Rudd.
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