Rising dollar not all brilliant news

AS EXPECTED, the Reserve Bank of Australia left its benchmark cash rate unchanged when it met last week.

The RBA meets on the first Tuesday of each month (except January) and announces its decision to the market later the same day.

Australia’s cash rate has now remained unchanged at the record low of 1.5% since August last year.

In the days following the RBA announcement the AUD/USD exchange rate breached the 80 US cent mark for the first time since May 2015.

On June 2 the AUD hit a low of 73.80 US cents. In the subsequent eight weeks the AUD has appreciated 8.4% against the Greenback.

According to St George Bank, the rally equates to almost 6% in trade-weighted terms.

However, the exchange rate movements appear to be more about USD weakness rather than AUD strength. Continued political uncertainty from the White House and lacklustre US growth data year-to-date are both weighing on the world currency.

The failure of Trump’s healthcare bill to pass Congress, investigations into Russian meddling in last year’s US election, the White House staff merry-go-round, North Korean missile tests and the souring China relationship over the South China Sea and North Korea are all weighing on the USD at the moment.

Of key concern to the RBA is that the strength of the AUD against the USD has slowed down growth in the Australian economy and will place more downward pressure on inflation, already running at the low end, or even below, the central bank’s target range of 2–3%. This in turn will weigh on employment due to the slower lift in economic activity.

Most market pundits do not expect a rate hike from the RBA this year, but they are also saying the likelihood of another rate cut is also reduced. Late last week, the June building approvals were released and the contraction was less than was forecast, adding support to the AUD.

Although it is widely anticipated to be close to peaking, the domestic housing market is obviously not as weak as expected.

Housing price appreciation in the key Sydney and Melbourne markets this year certainly supports that story.

As Shane Oliver from AMP Capital recently wrote: “With mining investment still falling, the consumer under pressure and housing construction looking like it is at or close to peaking, we need a contribution to growth from trade-exposed sectors like tourism, higher education, manufacturing and farming, but a rising Australian dollar will work against that.”

The high exchange rate is a windfall for Australians spending USD overseas.

But for tourists coming to Australia, the opposite is the case and international travellers tend to seek cheaper destinations when the AUD is high.

Australia is a large exporter of agricultural commodities. These exports are heavily influenced by trends in global demand and our competitiveness in international markets.

The high AUD decreases our competitiveness on the world stage. Commodity values have to decrease in AUD terms to meet the market.

We must also keep in mind the fact that an appreciating dollar decreases the price of imported farm inputs, such as oil, fertiliser and machinery. Unfortunately, with the way the current season is panning out, farm incomes will be down dramatically and I expect machinery sales probably peaked last financial year.

❝ Most market pundits do not expect a rate hike from the RBA this year.

— Peter McMeekin