The Australian Dollar: More Pain Ahead

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Includes: FXA, UDN, UUP
by: Sarita Pereira

Summary

Australia's trade deficit widened to $1.96 billion in September 2014.

The country's unemployment rate stood at 6.2% last month, its highest levels since 2003.

The U.S dollar index continues to rally on account of positive economic data.

Source: Yahoo Finance

Recently, the Australian Dollar touched a four year low of 85.53 against the U.S dollar. The widening trade deficit, high unemployment rate, and the rising U.S dollar continue to add pressure on the Australian Dollar.

Widening trade deficit

Source: tradingeconomics.com

Australia's trade deficit touched $1.96 billion (AUD2.26 billion) in September 2014 mainly due to falling commodity prices. Australia has reported trade deficits consecutively in the last six months. Iron ore prices are over 40% down this year, while thermal coal prices are hovering around $53.97 (AUD63) per tonne due to oversupply and weaker demand from China. Recently iron ore prices touched a five and a half year low of $75 per tonne due to supply surge and pollution clampdown by China.

The Chinese economy expanded 7.3% in the third quarter of 2014, its slowest pace since 2009.The Conference Board forecasts that the Chinese economic growth would slump to 4% by 2020. China's curb on pollution and its slowing economy will add further pressure on commodity prices and Australian exports to China.

Unemployment rate

Australia's labor participation rate continued to improve from 64.5% in September 2014 to 64.6% in October 2014. According to the Australian Bureau of Statistics, the number of people employed rose by 24,100 in October 2014 compared with September 2014. The Australian unemployment rate touched 6.2% in October 2014, its highest levels since 2003.

Source: Australian Mining

The October month witnessed slight improvement in mining employment after four months of continuous decline. In the last one year, the Australian mining industry witnessed sharp job cuts in the operations and mining services. The slowdown in the mining industry will add pressure on the Australian miners BHP Billiton (NYSE: BHP), and Rio Tinto (NYSE: RIO) to cut more mining jobs and move towards automation.

Rising U.S dollar

Source: Bloomberg

Last month, the U.S Federal Reserve announced to keep the interest rate near zero for a considerable time post ending of the quantitative easing program. This halted the U.S dollar rally for some time. The U.S manufacturing PMI stood at 55.9 for October, while it was 57.5 in September. The initial claims for unemployment benefits decreased by 10,000 to 278,000 in the week ended Nov 1, 2014. The number of continuing claims for unemployment benefits in the U.S fell by 39,000 to 2.35 million for the week ended October 25, 2014. The jobless claims have fallen to the second lowest level this year, which indicates the strengthening of the U.S labor market. The positive economic data fuelled the U.S dollar rally as it broke the 88 levels.

Today, the U.S Department of Labor will release its employment report for last month. Bloomberg has a consensus estimate of 240,000 for nonfarm payrolls. The U.S unemployment rate fell to six year low of 5.9% in September 2014. The U.S unemployment rate will fall to 4.7% by the end of 2015, provided the current trend continues. This will further strengthen the U.S dollar and add pressure on the Australian dollar.

Final Thoughts

The slowdown in the mining industry will affect Australia's trade deficit, and its unemployment rate. The rising U.S dollar will add further pressure. Hence, the depreciation of the Australian Dollar against the U.S dollar will continue for some more time.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.