Australian Dollar Smashed in Next Crash? Technical, Fundamental Analysis

Will the Australian Dollar be devastated by the next market crash? Let’s look at some charts of previous scenarios and explain why the Australian Dollar gets the short end of the stick when it comes to stock market crashes. We will also take a look at the recent “rise” against the USD and add a bit of clarity by zooming out.

Compared to other currencies, such as the Japanese Yen, the Australian dollar has suffered roughly double the fall during market crashes. Why does the “Lucky Country” get hit so much harder than others in such scenarios? The answer may be multi-pronged, but it fundamentally comes down to one factor: Economic complexity.

As highlighted earlier in the article “The Great Australian Scream,” Australia essentially extracts material from the ground, loads it onto boats, and receives a low price for the raw cargo. Japan, on the other hand, focuses on economic complexity and uses this to shield itself from market swings. That’s the difference between a safe-haven and a currency that is evacuated during crises. Here is economic complexity broken down by a popular Internet meme:

“A bar of iron costs $5. Made into horseshoes, it’s worth $12. Made into needles, it’s worth $3,500. Made into balance springs for watches, it is worth $300,000” – unknown.

Australia is selling the iron ore that is then made into bars. Let that sink in. Australia’s economic complexity ranks under that of Kuwait, Uganda, Pakistan, Laos, and Kenya. But will it improve? It has fallen 40 places since 1995.

Australia benefits during most stock market bull runs by being the beginning of the production line. The resources used to make, or to power production, come disproportionately from Australia. But when the going gets tough, that also puts it at the bottom of the pile.

We have looked at the big picture, showing the Australian dollar losing strength for the last roughly 15 years. Now let’s zoom in on the shorter term and analyse its recent bounce since the beginning of this year.

Although it has been on a rising trend, it has been failing and breaking down repeatedly. Suppose the US ends up keeping its interest rate high; any damage to the US stock market could send serious fallout to the Australian Dollar. The long-term and short-term prospects for the Australian Dollar look gloomy unless some very large changes come. If not, it may continue another decade of tumbles.