The Australian Economy
We have had the Interest Rate cut earlier in the month and we have the minutes of the Reserve Bank’s meeting today at 11.30am. Yesterday we heard from Philip Lowe, the Deputy Governor of Australia’s Reserve Bank, speaking in Sydney at the Corporate Finance Forum.The gist of his concluding statements is that due to the policies of Governments and Central Banks overseas with low interest rates and quantitative easing is that the Australian Dollar has been higher than it should be.
“In this challenging global environment, the RBA is seeking to play a constructive role. As I said earlier, low interest rates are supporting spending in the economy. The further reduction in the cash rate earlier this month will provide a bit more support and it will help reinforce some of the recent encouraging signs, particularly in household spending. In time, stronger consumption growth and a continuation of the pick-up in residential construction should lead to a lift in business investment.”
Deputy Governor Lowe goes on to point out that there is no “magic lever” but this is part of an ongoing policy to help the Australian Economy with business investment, exports and the housing market.
The policy is working against some currencies but not all, with no significant weakening against the United States Dollar or the Euro.
Australian Dollar to US Dollar (AUDUSD)
On April 13th this year the AUDUSD exchange rate was at 0.7589, and since then has been rising, opening this morning at 0.7992.. Considering the United States is one of our biggest trading partners, we are waiting to see whether the interest rate cut here will have the desired effect against the USD. Considering there is still an expectation of an interest rate rise in the United States combined with the fact that there is an enormous amount of debt due to be paid this year in USD (i.e. companies and governments will have to buy USD to repay this debt) we should see a gradual weakening in the AUDUSD exchange rate.
Australian Dollar to British Pound (AUDGBP)
The UK election is over and the markets reacted favourably to the news with a weakening in the AUDGBP exchange rate to 0.5104 this morning having been over 0.52 in the run up to the election. UK Interest rates have been held stable at 0.5% for more than 6 years now. According to Andrew Oxlade writing in the Telegraph in the UK, rates in the UK are not expected to rise until July 2016. With a rate cut here in Australia and energy prices still depressed we can expect the 2 currencies to trade within a fairly narrow range. No reason to expect the GBP to buy over 2 Australian Dollars unless there is unexpected news in the markets.
Australian Dollar to Euro (AUDEUR)
After all the Greek crises and the quantitative easing in the Euro zone the AUDEUR exchange rate has settled into the 0.7000 to 0.7020 range. The 2 forces driving the Euro are Germany and Greece.
There is still fallout from Greece’s debt repayment issues and we could still see Greece leave the Euro.
According to Adam Slater, a prominent UK Economist, more than 70 countries have exited currency unions since 1945. He goes on to say “While Greece’s gross domestic product could still slump about 10 percent, the decline could be limited and the economy may have undetected advantages that allow a decent recovery.”
Greece has a staggering amount of debt becoming due and has just kept afloat for the time being. However the long term problem has not been solved. With elections in France and Germany in 2017 and a possible referendum on being in the European Union looking more likely after a Conservative win in the UK, Europe’s wobbles look set to continue.
Until the issue is settled one way or another expect to see lots of fluctuations, but not necessarily significant long term declines in the AUDEUR exchange rate.