The Australian dollar has fallen four cents over the past six days as investors become increasingly pessimistic about the health of the Eurozone, and concerns increase about Chinese growth. Yesterday it hit a seven-week low and is trading slightly up this morning at 0.97 US cents.
"The Australian dollar is very sensitive to global sentiment," Commonwealth Bank of Australia currency strategist Joseph Carpuso says. "And the worse things get for the global economy, the worse it is for the Australian dollar."
The effect of the falling dollar on the Australian economy will be mixed.
Carpuso says importers who typically hedge for up to three months might dodge the sharp fall, but others will be caught up.
Still, he doesn't believe it will affect Christmas trading nor coax the central bank into big interest rate cuts.
"They'll look at how the world economy is going and how the mining boom is holding up instead," he says.
His comments follow a prediction by JPMorgan that rates could fall to 3.75%, a sharp decline from current levels of 4.5%.
Although there was some speculation this year that the Australian dollar had decoupled from the US dollar, Carpuso says the recent flight to the US dollar – despite the country's well-documented debt load – highlights that the greenback remains the world's pre-eminent safe haven currency, and the Aussie is still seen as a "risky" currency.
Carpuso says although sentiment on the Aussie dollar is largely driven by Chinese demand and the health of the global economy, there's good cause to be more pessimistic about the European banking system.
"Overnight one of the bad signs was the German Government struggled to sell all its debt," Carpuso says.
With Germany struggling in six of its last eight auctions, Carpuso says if the "supposed safe haven" of Europe is struggling, it's a "bad sign for Europe, and therefore the global economy".
Germany sold just Є3.6 billion worth of its benchmark 10-year bond overnight, out of €6 billion on offer, in a result described by HiFX senior trader Stuart Ive as one of the country's "poorest sells ever".
"The banking system in Europe is certainly in trouble," Carpuso says.
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Suffer little children - austerity measure are going to hurt and for a long time