Will Economics Push AUD to the Top of the Currency World?

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>The Australian Dollar “could be the foreign exchange market's star” as it’s notably undervalued. However, it can only become the proverbial star of forex once the world “rids itself of its current list of ills.” That’s the opinion of Kit Juckes, head of FX research at Société Générale. Like anything in the financial world, one person’s opinion can be countered by the opinions of others. That’s par for the course in finance, but that doesn’t invalidate Juckes’ position. With that being the case, it’s worth exploring whether or not the Australian Dollar (AUD) could be set for a meteoric rise.

A World of Currencies

To do that, it’s worth explaining what we mean by forex. Let’s do that by way of a practical example. With forex trading with AvaTrade in Australia, you get access to a decentralized exchange where international currencies are traded. Currencies are traded in pairs, which means you’re playing the value of one currency against another. Specifically, a currency pair refers to how much of one currency (the quote currency) you need to buy a single unit of the other (the base currency).

This type of trading is extremely popular. In fact, forex is the most liquid financial market in the world. Therefore, when it comes to statements such as those made by Juckes and quoted on Pound Sterling Live, they mean something. Indeed, if the AUD does become one of the strongest currencies in the world, it not only has implications for the forex market but also for Australia. In essence, a strong currency translates into a strong economy.

Will the Landing be Hard or Soft?

The question, therefore, is how AUD could become the forex world’s proverbial star. According to Juckes, a lot depends on whether the coming months result in a “hard” or “soft” landing. As defined by the Société Générale, a hard landing is where the US and Eurozone experience a recession. This, in turn, creates favorable macroeconomic conditions for the US Dollar at the expense of other currencies, such as AUD. A soft landing will occur if the US and Eurozone undergo a cyclical slowdown in economic growth, which is explained in detail by The Business Professor.

This slowdown helps to bring interest rates and inflation closer to each other and, ultimately, avoid a recession. If a soft landing occurs, Juckes believes it will help the Yen and the Aussie Dollar. Are we heading for a hard or soft landing? That’s a tough question to answer because the current economic situation is so finely balanced. Wall Street stock prices were trading higher at the start of July based on the fact that interest rate hikes might not be as aggressive as many thought they would be, which we covered here on MarketBeat. This is the current balancing act central banks are facing.

Economics is all About Balance

Increase interest rates too aggressively and it could cause a recession. Don’t push them high enough and inflation could spiral further out of control. If central banks strike the right balance, it could help tackle rising inflation and prevent recessions in the US and Europe. That would create the necessary conditions for what Juckes sees as a hard landing for AUD. If central banks get it wrong, the Australian Dollar could be in a position to thrive.

The AUD's performance in mid-July 2022 suggested that it could be moving into a strong position as it was up over 1.2% against the US Dollar, which is something we've been monitoring with interest here at MarketBeat. However, things can and often do change fairly quickly in the forex markets. That means Juckes could easily be right when he says AUD will rise up. However, he could just as easily be wrong. Therefore, the lesson here is that you shouldn’t be fixated on a single point of view in forex or the financial markets in general.

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