Weaker Aussie dollar will keep exports competitive

SYDNEY: The Reserve Bank of Australia (RBA) would really prefer if its currency didn’t trade above 80 US cents, eroding the competitiveness of its exports sector just as the economy is trying to recover from the pandemic.

Since its float in December 1983, the Australian dollar has averaged 75.90 cents. Given this history, Australians tend to think that a 7 in front of it is about right; an 8 is getting high, while a 6 means something significant is happening offshore or there are problems at home.

“The conversation around the Aussie changes when you leave the 70s,” said Sean Callow, senior currency strategist at Westpac Banking Corp in Sydney. “The RBA might be dismayed by the break of 0.80 but given the commodity price backing is so strong, they should take some comfort that the Aussie dollar doesn’t seem overvalued. It’s a headwind, but they saw worse in 2011-12.”

The floating exchange rate acts as the economy’s shock absorber: it slumped to 55 US cents in March last year as Covid-induced market turmoil peaked. Since then, it has surged more than 40% as central banks pumped monetary stimulus, authorities suppressed the virus and commodity prices rebounded on a wave of global liquidity and Chinese demand. The currency last hit 80 US cents in 2018.

“A number as round as 80 US cents is a milestone,” said Callow. “You also have the likelihood of options strikes or stop losses around that figure.”

A large build up of options contracts that give traders the right to sell as much as A$4.3bil of the currency at 79 US cents remain in play until Friday, which is likely to slow its ascent over the next few days.

It traded at 79.29 US cents at 1:44pm yesterday in Sydney.

Even with Australia’s borders closed for almost a year now, shutting down the country’s top services exports of international education and tourism, currency appreciation is still a worry, according to Ian Harper, who sits on the RBA’S board.

“Has the weight that’s placed on what might happen to the exchange rate, when thinking about how quickly the bank achieves its objectives, has that changed? Well no,” said Harper. He points out services only make up 25% of exports. The other 75% are commodities.

Trade statistics show that exporters with limited market dominance are already impacted by the eroding competitiveness.

The RBA has made no secret that it had the currency partly in mind when it launched a A$100bil (Us$79bil), six-month quantitative easing (QE) programme in November targeting longer-dated bonds.

The central bank followed up earlier this month by announcing another A$100bil of purchases from mid-april, when the current programme ends.

Christopher Kent, who oversees financial markets at the RBA, reckons the currency would’ve been higher without these QE programme.