In the recession of 2008, the AUD tanked. What will happen this time?

The US has just recorded two consecutive quarters of negative growth, and on July 26 the IMF warned that, ‘The world may soon be teetering on the edge of a global recession’.

In previous recessions, commodity prices fell dramatically. The fall in commodity prices and the rush to a safe haven currency took the Australian dollar down 38% from 97.9 US cents on 15 July 2008 to 60.5 on 27 October the same year.

In the 2020 recession, the AUD fell from 70.2 on 1 January to 57.4 on 20 March – an 18% fall.

Could the same happen again? If so, when and how much?

For the Australian dollar, the big question revolves around what will happen to commodity prices. As Australia’s largest exports are commodities – iron ore, coal, and Natural Gas – the Australian dollar moves up and down with these commodity prices.

Iron Ore lost almost two-thirds of its value between June and October 2008. It also fell by more than half between May and November 202 1. Recessions are not good for iron ore prices.

How far are we from a recession?

Depending on your definition, the US could already be in a recession – having experienced two consecutive quarters of negative growth. According to official figures, the world’s largest steel supplier and iron ore user, China, has slowed down to just 0.4% annual growth in the second quarter.

Of further note in the second quarter, according to official Chinese figures, manufacturing contracted by 0.3% and construction – the driver of the economy and a considerable driver of iron ore demand – grew by a relatively slow 3.6%.

One of the best ways to determine the direction of the global economy is the price of copper. Copper is often described as ‘the metal with a PhD in economics’ because it seemingly predicts where the economy is going.

Over the past six months, copper prices have fallen from 4.79 to 3.62 USD/lb – a 19% fall. This is well short of the 50%+ price collapse in 2008 , which started in June and preceded the global economic slowdown and the rapid fall in the AUD.

If the above analysis and assumptions are correct, it appears that if the world isn’t already in a recession, it may be getting close.

How far could the Aussie dollar fall?

Currently, the AUD is around 69 US cents. Historically, the Aussie dollar has traded between 60c and 100c (parity). It has only broken out above 100 in the commodities boom of 2011-12 and below 60 briefly in the early stages of the Covid outbreak in March 2020.

That’s not to say that the Aussie dollar will remain range-bound, but it does possibly create a psychological barrier.

Given that the tight natural gas market may buoy up prices in the medium term, this could shield the Aussie dollar from some of the impact of softness in iron ore and coal prices.

Nevertheless, given that the AUD/USD previously dipped by over 50% in 2008 and 18% in 2020, a 17% drop to around 60c may be well within the realm of possibility, assuming that this trend continues.

A fall in the Aussie dollar could net a significant windfall with the right trade.

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