The young guns are awakening. Paul Bloxham is out this morning with a new note supporting moves to lower the dollar:
Last week brought some large jolts to Australian financial markets. The RBA cut the cash rate to a 53 year low and by the end of the week the AUD had dropped below USD parity for the first time in nine months, albeit only for a few hours. The RBA would have been heartened by the currency move, as the high AUD had been a particular concern recently and was a key reason for last week’s cut. Of course AUD weakness partly reflected USD strength and currency markets are fickle.
Nonetheless, some AUD weakening is tonic for growth and further weakness would help Australia to pull off its great
rebalancing act – the shift from mining to non-mining led growth. True, low rates are already doing some of the work – lifting household consumption and the housing market – but the high AUD has been a key factor holding back the exchange rate sensitive sectors.While the effect of the high AUD is gradually wearing off – as firms and households get used to it – the effect is only wearing off slowly, and some industries, including manufacturing are still under a great deal of strain. A lower AUD would help support these sectors.
…
Our currency strategists expect that the AUD could head towards US95 cents by year-end and also be US95 cents by end 2014. Of course, even at that level, the AUD would be fairly high – its average over the post-float period is US75 cents. But that kind of depreciation would probably be enough to ward off further rate cuts. Models suggest a 10% depreciation of the TWI would likely add about 0.4ppts a year to the CPI. Higher inflation could, of course, limit the Reserve Bank’s room to cut further.
Wrong I suspect. 95 cents isn’t going to cut it. We need to back at 80 cents for starters and much lower still over time to get serious impact. The RBA will have to look through tradable inflation for a time, as Ross Garnaut has suggested.
But good on the young guns. A lower dollar, boosting manufacturing and macroprudential policy all in one morning is good progress!
130513 Australian Economics Comment – Lower AUD Would Help Rebalancing Act (1)
