| Date | Canadian Dollar (CAD) | Australian Dollar (AUD) | New Zealand Dollar (NZD) | Norwegian Krone (NOK) |
|---|---|---|---|---|
| 1-Jan-23 | 100 | 100 | 100 | 100 |
| 31-May-23 | ~94 | ~82 | ~91 | ~88 |
Throughout 2021 and 2022, high global demand for energy and industrial metals bolstered the Australian economy, with surging coal and liquefied natural gas (LNG) export revenues. This attracted substantial portfolio investment, strengthening the Australian dollar (AUD).
However, by early 2023, the European Central Bank (ECB) embarked on an unprecedented monetary tightening cycle, rapidly raising its main refinancing rate to curb Eurozone inflation. This narrowed the yield differential between Euro-denominated assets and Australian debt. Concerned about an economic slowdown in China—Australia's largest trading partner—and a subsequent drop in global industrial demand, international investors rapidly reallocated capital towards lower-risk Euro assets.
In the five months leading to June 2023, the Australian dollar faced severe downward pressure, falling by approximately 18% against the Euro, despite the Reserve Bank of Australia lifting its cash rate from 3.1% to 4.1%. Concurrently, global prices for metallurgical coal and iron ore tumbled by over 25%, significantly reducing Australia's trade surplus.
With reference to Figure 1 and Extract A, explain one likely reason for the fall in the exchange rate of the Australian dollar.
