THE Australian dollar has continued its downward trend, falling to a six-year low against the US currency of US75.6c in trading overnight, before recovering a little to US75.96c this morning.
May 2009 was the last time the currency was trading as low as it is this morning.
The primary reason is not so much weakness in the financial market’s assessment of the A$, as strength in the US$, which continues to rise strongly against all major world currencies, as the US economy gets back on its feet.
A softer A$ is a boon to beef exporters, making our product more affordable and competitive in comparison with US equivalent in export markets, including the US itself.
The move lower is going to be a salve for the Australian economy in need of a growth engine, Reserve Bank assistant governor Christopher Kent noted this morning.
The currency depreciation was now starting to play a role in helping the economy adjust, Mr Kent said, although the RBA indicates it still wants to see the A$ move lower, in the lee of the big drop in mining sector momentum.
“Even at current levels, our exchange rate remains relatively high given the state of our overall economy,” he said.
The outlook for the A$ going forward is highly dependent on the US dollar’s continued rally and with that in mind, forecasts of a Euro into the US80s in 2017 implies an Aussie dollar that will be trading well into the 60s against the US$, analysts said this morning. Australia has not seen a currency in the US60s since 2006.
Mr Kent’s comments echoed a Reserve Bank assessment released last week suggesting that the A$ was about 2pc overvalued last month, and could still be considered too strong to achieve “desired domestic economic outcomes.”
The RBA left its benchmark interest rate unchanged at a record-low 2.25pc last week, after cutting in February.
Mr Kent’s speech yesterday focused on how and where Australia’s growth will come from in the longer-term and the need to boost productivity. He noted the benefits of record-low rates in stimulating consumption and housing along with a rising population and nominated Australia’s expanding services industries as the most likely source of economic expansion.
“The Australian economy has good prospects for growth over the longer term,” he said. “We will probably see a continuation of trends such as the growing importance of the services sector in our economy, which is relatively intensive in terms of employment. Resource production and exports are less employment-intensive, but the significant investment in that sector will continue to bear fruit for a long time.”
Traders are pricing in almost two more rate reductions from the RBA over the next 12 months.
Mr Kent said the weakening currency will improve the competitiveness of local industries.
“A lower exchange rate will provide support for demand for the output of the wide range of firms operating in the tradable sector,” he said.