Indonesia And India Have Suddenly Become A Big Downward Force On The Australian Dollar

Indian rupeeGetty / File

There’s a new strand emerging in the story of the Australian dollar’s decline against the USD: the volatile conditions in Indonesia and India.

Markets in both countries have been towelled this week, but their current account deficits are growing and the weakening of their currencies is now a downward force on the Australian dollar against the greenback.

Commonwealth Bank’s chief currency strategist Richard Grace has a note out this afternoon titled “Asian currency risks looming over AUD” outlining the widening current account deficits in both countries. (See the chart from the note on the right.)

CBA

Basically with three-quarters of Australia’s exports going to Asia, large moves in Asian currencies can have a big impact on the AUD. From the note:

The two weakest currencies in the Asian region (INR and IDR) reflect their economy’s widening current account deficits. Over the last few years, the current account balances in both Indonesia and India have moved from current account surpluses to current account deficits. Recent developments have taken Indonesia’s and India’s current account deficits to levels as large as they were (as a % of GDP) during the 1997-98 Asia Crisis (and in India’s case, even larger).

But there’s an extremely important rider to this:

However, it is important to note that Indonesia and India’s economies remain the exception to aggregate regional current account surpluses across Asia. Hence, we don’t expect a pattern of contagion to develop as it did in the 1997-98 Asia crisis. Rather it is more likely AUD rallies will continue to be sold into for a period of time. Adding near-term downward pressure to AUD are the minutes of the RBA’s August meeting. The minutes reveal the RBA has not abolished their easing bias, as was originally perceived following the publication of their monetary policy statement on 6 August.

So, more complexity. The Aussie has been holding relatively steady in recent weeks, even trading at its highest level since late July on Monday. But the events in Indonesia and India have opened the gate on the familiar slide again.

Follow Business Insider Australia on Facebook and Twitter

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.