Hot Take: The Aussie dollar's fresh lows

The Australian dollar fell below 62 cents to the US dollar earlier this week, its lowest level in more than two decades outside of a brief stint below that mark during the depths of the pandemic panic. What's especially noteworthy is the recent trend, leading to posts like this on social media:

Many replies were of the doomsayer "it's going to zero" types, although at least some were optimistic, hoping that there might be "a silver lining for local producers with cheaper exports".

On both counts, my response is: unlikely!

Never reason from an exchange rate change

An exchange rate is the value of one currency relative to another. It's a nominal rate, so tells us nothing about why these valuations change, nor about what they might mean for Australians.

Think of an exchange rate as a price. You wouldn't discuss the price of bananas without first considering whether the price change was due to some new banana cake recipe on TikTok (demand), or a cyclone in Queensland (supply).

The same applies to an exchange rate: is the price changing due to demand or supply? Knowing the causal forces helps to understand not just the recent movement, but also potential future movements.

China, Trump and the trade wars

As is frequently the case, the current depreciation looks to be multi-causal, i.e. there are several demand and supply forces working to push the dollar's price down.