Reserve Bank happy to see dollar trend lower
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.
Frequently Asked Questions about this Article…
The RBA's June board minutes said the bank appears happy to see the Australian dollar trend lower and that it is open to cutting the cash rate again. The minutes noted the dollar had "depreciated noticeably" since the May cash rate cut but still remained high given the decline in export prices over the past year and a half, and that further depreciation as the terms of trade declined could help rebalance growth.
According to the minutes, a weaker Australian dollar could help stoke economic growth by fostering a rebalancing of growth as the terms of trade decline. The RBA welcomed the currency's fall — carefully framed in its wording — as a way to support growth without relying solely on exchange-rate moves.
The Australian dollar fell about a quarter of a cent after the minutes were released, dropping to roughly US95.17c in the morning session and trading around US95.09c late on Tuesday, according to the article.
Analysts quoted in the article had differing views: RBS senior currency strategist Greg Gibbs said the RBA's wording was chosen to subtly encourage weakening. Citi economists Josh Williamson and Paul Brennan said the dollar is now more aligned with the terms of trade and that further falls are likely as cyclical drivers change. NAB currency strategist Ray Attrill forecast the dollar would fall to US93c by the end of this year, US87c by the end of next year, and expected US83c by the end of 2015.
The article explains the terms of trade as a ratio that measures export prices relative to import prices. Citi economists said the Australian dollar has become more aligned with the terms of trade, and that further falls in the terms of trade (for example, from weaker commodity prices) are likely to be followed by weakness in the currency.
The board noted that lower interest rates were having an effect on the economy, but that wage growth and business conditions remained subdued. It also said there was "considerable uncertainty" about mining investment after it peaks and plateaus at a high level over the next year.
The RBA said the US dollar was an important contributor to the AUD's recent depreciation, but the Australian dollar also fell against most of its peers. The bank pointed to its May rate cut, falling commodity prices and concerns about China's economy as factors behind the decline.
Investors can read the RBA's full reasoning in the June board minutes published by the Reserve Bank. The article also cites commentary and forecasts from market participants including RBS strategist Greg Gibbs, Citi economists Josh Williamson and Paul Brennan, and NAB strategist Ray Attrill for additional currency outlooks.
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