From the Eternal Sunshine of the Spotless Mind today:
Australia’s great rebalancing act is underway, but its pace has been slow, largely because of the persistently high AUD. As expected, mining investment is falling sharply and, although resources exports are ramping up, the mining sector is contributing less to growth than it had been in previous years. Low interest rates are also largely doing their job, supporting housing prices and dwelling construction. But, in the face of falling commodity prices, the high AUD has acted as a drag on income growth. It has also hindered competitiveness and appears to be discouraging non-mining business investment.
This has meant that, instead of the adjustment to the end of the mining boom coming from a lower AUD, it is occurring through falling real wages and a rising unemployment rate.The AUD remains too high. Despite the prices of Australia’s main commodity exports – iron ore and coal – falling this year and Australia’s 10-year bond interest rate differential with the US narrowing to an 8-year low, the AUD has appreciated, rather than declined.
Next week’s Q2 GDP print is expected to show the drag on growth caused by the high AUD. We expect GDP growth may have slowed to +0.2% q-o-q (+2.8% y-o-y). Growth is being squeezed by the combination of lower commodity prices without the help of a lower AUD. The income squeeze is expected to have held back spending. Mining investment is set to fall and we expect only weak growth in non-mining investment. However, more timely indicators suggest some more recent improvement in economic conditions and show that the housing market is still booming, making the RBA reluctant to cut further.
In our view, the longer the AUD stays high, the longer the RBA is likely to leave rates on hold. With this in mind, we now expect the RBA to be on hold until mid-2015, with a hike pencilled in for Q2 2015 (previously Q1 2015). Clearly, much depends on the outlook for the AUD, with our currency strategists still expecting it to fall in coming quarters.
From memory this is the third push back. There’s no rate hike coming, dude.
