Trade-weighted index

IBISWorld forecasts the trade-weighted index to climb by 1.3% in 2024-25, to 62.5 index points. While this represents an improvement from 2023-24, the trade-weighted index remains weaker compared to a decade ago. Due to concerns about inflation, the RBA is expected to maintain a strict monetary policy, keeping rates high. This stands in contrast to other central banks, like the US Federal Reserve, which have already begun rate-cutting cycles. Persistent inflation from sectors like housing, food and transport may pressure the RBA to maintain steady cash rate at 4.35% for an extended period, boosting demand for the Australian dollar and driving the exchange rate higher. However, the slowing economy in China has inhibited further increases in the Australian dollar. As China significantly influences Australia's resource exports, economic downturns in China negatively impact demand for exports and the flow of foreign investment, particularly in resources and tourism. The price of critical Australian commodity exports like iron, steel, coal and liquified natural gas (LNG) are expected to drop over 2024-25 due to improving global supply and deteriorating terms of trade. Still, sustained demand from Europe and emerging Asian economies like Japan and India are expected to prevent further decline.

The Australian dollar declined significantly over the two years through 2019-20. Over the same period, the US Federal Reserve tightened monetary policy with a series of rate hikes. In contrast to US monetary policy, the Reserve Bank of Australia implemented a series of cash rate cuts over the two years through 2019-20, placing downward pressure on the Australian dollar. The US Federal Funds rate rose beyond the RBA cash rate after a quick post-pandemic economic recovery caused persistent high inflation in 2022-23. This made the Australian dollar less appealing, causing it to depreciate, especially against the US dollar, during those two years.

China's economic prospects and demand for Australian exports have also significantly influenced the trade-weighted index. Economic growth in China and rising demand for Australian commodities placed upward pressure on the Australian dollar over the past five years. However, demand conditions have been volatile, with the trade-weighted index trending downward for part of the period. The heightened trade tensions between the US and China added to the uncertainty of the Chinese economy contributed to the Australian dollar's decline from 2019-20. This is because the Australian economy faces significant risk from a downturn in the Chinese market. Also, the escalated trade tensions between Australia and China in 2020-21 resulted in trade measures on Australian exports, including coal, wine, seafood and barley. These tariffs have gradually been removed.

The pandemic had a varied effect on the trade-weighted index. During the March quarter of 2019-20, the Australian dollar fell sharply as demand for the safe haven US dollar rose amid a severe global economic downturn. However, the Australian dollar recovered over 2020-21, buoyed by a robust domestic economic recovery and escalating commodity prices. On the other hand, higher interest rates in Australia compared to other nations are expected to prop up the Australian dollar in 2024-25. Overall, IBISWorld forecasts the trade-weighted index to rise at a compound annual rate of 1.3% over the five years through 2024-25.