Reserve Bank happy to see dollar trend lower

The Reserve Bank appears to continue talking down the Australian dollar to help stoke economic growth, while the latest board minutes released by the central bank suggests it is open to cutting the cash rate again.

The Reserve Bank appears to continue talking down the Australian dollar to help stoke economic growth, while the latest board minutes released by the central bank suggests it is open to cutting the cash rate again.

Although 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 on Tuesday.

"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 after the release of the minutes, falling to about US95.17¢ in the morning session. It was at US95.09¢ late on Tuesday.

RBS senior currency strategist Greg Gibbs said the Reserve Bank's board members would have "chosen their wording carefully in the hope that it might cause the currency to weaken".

"Obviously it's a very subtle attempt because the market doesn't like overt pressure from central banks and normally rails against it. This is an example where they spoke in a way where they will welcome the currency's fall but not rely on it."

Citi economists Josh Williamson and Paul Brennan said the 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 weakness in the dollar, the economists said.

The Reserve Bank said while the US dollar was an "important contributor" to the Australian currency's recent depreciation, it also fell against most of its peers. It said this was a reflection of its May cut, falling commodity prices and concerns about China's economy.

The board members noted that lower interest rates were having an effect on the economy, but that wage growth and business conditions remained subdued. They said there was "considerable uncertainty" about mining investment after it peaks and plateaus at a high level over the next year.

NAB currency strategist Ray Attrill said he expected the dollar to fall to US83¢ by the end of 2015. NAB also forecast the currency to fall to US93¢ by the end of this year and US87¢ by the end of next year.

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles