Weak dollar eases pressure to cut rates
The currency lifted slightly on Monday, following better than expected house prices and manufacturing data, after falling to a 34-month-low of US91.1¢ on Monday morning.
The dollar has lost more than 10 per cent of its value since the Reserve Bank last eased rates in May. It was trading at US91.99¢ late on Monday.
"The Reserve Bank can afford to hold steady, and it all comes back to the exchange rate," Barclays chief economist Kieran Davies said.
"They've wanted to see a lower dollar for quite a time now, and it's finally going their way. It's fallen a lot in a short space of time."
The Australian Performance of Manufacturing Index rose 5.8 points in June to 49.6, just below the 50-mark, which signals an expansion in activity. But exports continued to struggle despite the falling dollar, the monthly survey found.
The housing market strengthened in June, with dwelling values rising 1.9 per cent across eight cities, the RP Data-Rismark Index found. Capital city home values lifted by 3.8 per cent during the 2012-13 financial year after a 3.6 per cent fall the previous year.
Inflation remain unchanged last month but rose 2.4 per cent in the 12 months to June, the TD Securities-Melbourne Institute gauge released on Monday found. It left the door open for further rate cuts by the Reserve Bank if they were needed to stimulate the economy.
The latest figures came as Moody's reaffirmed Australia's AAA foreign and local currency ratings, citing the country's "very high economic resiliency, very high government financial strength, and very low susceptibility to event risk".
The positive economic data was overshadowed by concerns about Chinese manufacturing on the Australian sharemarket.
While markets had expected the slowdown in Chinese PMI for June, the recent credit crunch in the interbank market was not captured in the data, suggesting further readings could be weaker.
The benchmark S&P/ASX 200 Index closed sharply lower on Monday, falling 1.9 per cent to close at 4710.2 points. The broader All Ordinaries Index slipped 1.8 per cent to 4689.7 points.
The Reserve Bank's index of commodity prices for June, released late on Monday, also reflected the recent falls in the prices of iron ore, gold, coal, rural commodities and base metals.
Economists said further rate cuts later this year still could be on the cards amid a slower than expected transition towards non-mining-led growth.
Frequently Asked Questions about this Article…
The article says a weaker Australian dollar reduces pressure on the Reserve Bank to ease monetary policy, meaning the RBA can more comfortably keep the cash rate on hold at its board meeting because a lower currency helps support the economy and inflation.
According to the article, the dollar fell to a 34-month low of about US91.1¢ and has lost more than 10% of its value since the RBA last eased rates in May; commentators like Barclays chief economist Kieran Davies note it has fallen a lot in a short space of time.
The Australian Performance of Manufacturing Index rose 5.8 points in June to 49.6, just below the 50 mark that signals expansion, suggesting manufacturing activity is close to turning positive—which investors may view as a sign of gradual improvement but with exports still struggling.
The RP Data‑Rismark Index found dwelling values rose 1.9% across eight cities in June and capital city values climbed 3.8% over the 2012‑13 year, reversing a prior fall; this housing strength can influence consumer confidence, property investors' returns, and broader economic momentum.
Inflation was unchanged last month but rose 2.4% in the 12 months to June according to the TD Securities‑Melbourne Institute gauge, which leaves the door open for further rate cuts later in the year if the RBA decides they are needed to stimulate the economy.
Despite some positive domestic indicators, concerns about Chinese manufacturing and other factors pushed the benchmark S&P/ASX 200 down 1.9% to 4710.2 points, with the All Ordinaries slipping 1.8%—showing international issues can still weigh heavily on local stocks.
The Reserve Bank's commodity price index reflected falls in iron ore, gold, coal, rural commodities and base metals in June, which signals potential headwinds for miners and commodity‑exposed companies and is something investors in those sectors should monitor closely.
Moody's reaffirmed Australia's AAA foreign and local currency ratings, citing very high economic resiliency and government financial strength, which reassures investors about the country's strong credit profile even amid mixed near‑term economic signals.
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