AS expected the Reserve Bank of Australia (RBA) 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 record low of 1.5 per cent since August of last year. In the days following the RBA announcement the AUD/USD exchange rate breached the US80c mark for the first time since May, 2015.
On June 2 the AUD hit a low of US73.8c. In the subsequent eight weeks the AUD has appreciated 8.4pc against the greenback. According to the St George Bank, the rally equates to almost 6pc in trade-weighted terms.
However, the exchange rate movements appear to be more about USD weakness rather than AUD strength. The continued political uncertainty emanating 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, continued 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 presidency and 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 2-3pc. 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 that the likelihood of another rate cut is also reduced. Late last week, the June building approvals were released and the contraction was certainly 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. The 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 welcome windfall for Australians, who are spending USD overseas, as their buying power improves as the exchange rate increases. But for tourists coming to Australia, the opposite is the case and international travellers tend to seek cheaper destinations when the AUD is high.
As we know, 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, or Australia, misses out on the business.
Here again there is a flip side. 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 that machinery sales probably peaked last financial year.