The value of the Australian dollar has been slashed due to lower interest rates than overseas and fears about China’s slowing economy, making the RBA’s inflation fight more challenging.
Morgan Stanley analysts said the Aussie dollar was “falling sharply” after approaching US70¢ in July.“The carefully calibrated dovishness of the RBA arguably started the recent trend, but the faltering data out of China and ensuing debate around rising growth and deflation risks have pressured the AUD back to sub-US64¢, levels not seen since October 22 and well below the five-year average of circa US70¢,” Morgan Stanley analysts Chris Nicol and Chris Read said in a research note.
“This is less important for the current year when inflation is expected to fall from 8 per cent to 4 per cent, but could become a much more important headwind for the RBA next year when it is forecasting inflation to fall from 4 per cent to 3 per cent,” Morgan Stanley said. Coolabah Capital chief macro strategist Kieran Davies said there would need to be a sustained weakening in the Aussie dollar before local businesses passed on higher import costs to consumers.“The lower dollar is not surprising because the RBA has a lower cash rate than other central banks and is forecasting a later return [mid- to late 2025] to its inflation target,” Mr Davies said.
Central banks have increased policy interest rates to 5.5 per cent in New Zealand, a 5.25 per cent to 5.5 per cent range in the United States, 5.25 per cent in England, 5 per cent in Canada and 4.25 per cent in Europe.Norway’s central bank increased interest rates in June and July to take the policy rate to 4 per cent, and cited weakness in the Norwegian krone as an inflation risk.
National Australia Bank analysts on Tuesday downgraded their forecasts for the Aussie dollar. NAB tips the Aussie to be US64¢ at the end of September and US66¢ by the end of the year.The NAB forecasts assumed there would be at least one more 0.25 of a percentage point increase by the RBA in November after the third-quarter inflation is reported.
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