RBA talks the dollar down

By , 10/11/2018 22:15

Reserve Bank has scope for more rate cutsMichael Pascoe: RBA miss negates minutes’ smile

The Reserve Bank sees further falls in the Australian dollar to help rebalance economic growth as the mining boom peaks.

While the dollar had “depreciated noticeably” against other currencies since its May cash rate cut, it “remained at a high level considering the decline in export prices that had taken place over the past year and a half”, the central bank said in its June board minutes published today.

“It was possible that the exchange rate would depreciate further over time as the terms of trade declined, which would help to foster a rebalancing of growth in the economy.”

The Australian dollar lost a quarter of a cent following the release of the minutes, falling to about 95.17 US cents just after 11.30am. It was trading at 95.22 US cents about 1.40pm.

RBS senior currency strategist Greg Gibbs said the fall may have been driven by the RBA’s desire for a lower dollar coupled with its lack of concern over inflation fears, given a moderation in wage growth.

Citi economists Josh Williamson and Paul Brennan said the Australian dollar was now more aligned with the terms of trade – a ratio that measures export prices to import prices.

Changes in the cyclical drivers of the currency, such as Asian currencies and risk sentiment, meant further falls in the terms of trade was more likely to be followed by more weakness in the dollar, the economists said.

The Reserve Bank noted in its minutes that the Australian dollar had dropped against most currencies as a reflection of its rate cut in May, falling commodity prices and concerns about China’s economy.

NAB currency strategist Ray Attrill said in a briefing today he expected the dollar to fall to a “fair value” of 83 US cents by the end of 2015. NAB also forecast the currency to fall to 93 US cents by the end of this year and 87 US cents by the end of next year.

“We will see substantial depreciation coming through over the next year or two,” Mr Attrill said, adding that some of the recent losses of the currency could be consolidated as the futures market showed that a large amount of investors were short on the dollar.

Financial markets were pricing in a 22 per cent chance of a rate cut in July, and at least one more 25 basis points cut by the end of the year.

Most economists said they expected one more rate cut from the Reserve Bank between August to November this year.

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