By now, you've probably heard about the flashfloods that have been hitting northern Australia. It's the worst floods that the state of Queensland has had in 50 years. The disaster is projected to wreak havoc to about 1 million square kilometers, forcing around 4,000 people to evacuate their homes. To put the size into perspective, the land area is equal to the size of Germany and France combined!
Doing the math, officials say that the damages will amount to around 5 billion AUD. Ouch!
Furthermore, it seems that the effects of the floods have been spilling over onto the charts of AUD/USD!
After setting a new all-time high at 1.0256 on the last day of 2010, it has stumbled out of the gates at the wake of 2011. Since the beginning of the week, the pair has drowned 300 pips and is currently trading at .9940. At this rate, it may just hit the November lows at .9550 by the end of the month!
And who's to say that this is out of the question? If you went through the School of Pipsology and checked out our section on Australia, you would have learned that the Australian dollar is highly affected by weather conditions.
Way back in 2002, when Justin Beiber still had a high-pitched voice (oh wait a second...), Australia was also hit by adverse weather conditions. Specifically speaking, Australia experienced a major drought. Within a month, AUD/USD had dropped a solid 10% to hit an all-time low at .4770.
If these weather conditions continue, it's quite possible that we'll see the Aussie continue to slide down the deep end.
The effects of the flooding are bittersweet. On the one hand, the floods have claimed thousands of homes and billions of Aussie dollars in damages.
But on the other hand, the flooding has caused the Aussie has dropped in value, which gives the RBA less to worry about. Remember, the RBA has been showing concerns on the persistent rise of the Aussie. They said that the Aussie's appreciation could negatively impact demand, as it makes Australia's exports much more expensive.
With this new development, it looks like the RBA will have to pause with its aggressive rate hikes. For now, the focus is to rebuild, and that will require an expansionary monetary policy. Let's see what the RBA has to say about the issue at their next interest rate meeting.