A bout of bullishness has seen the AUD rise since early last month, yet the fundamental problems facing the Australian economy – falling export prices for commodities and an overvalued currency that prevents companies from moving higher up the value-added scale – are likely to see the currency fall over time.
In order to understand why the AUD is likely to fall, let's first take a look at why itrose so much over the last several years.
A lot of the AUD's rise comes down to the improvement in the country's terms of trade. "Terms of trade" is an economic concept that refers to the price of what a country exports relative to the price of what it imports.
For example,Australia exports coal, among other things, and buys TV sets from Korea. Since 2005 the price of a 32" TV set has come down from $2,600 to less than $340.Meanwhile, the price of a ton of coal has risen by 60 percent, from $50 to $80.As a result, back in 2005 Australia had to export 50 tons of coal to buy one TV set and now it only has to export four tons. Thus, it's no surprise that the AUD appreciated from around 800 KRW in 2005 to 1,200 KRW in 2012.
However, coal prices have been coming down recently and as a result the AUD is starting to weaken against KRW and other currencies.