The Australian dollar touched a new 6-year low on Monday of 0.7327 against the US dollar as global commodity prices continue to take a battering amid oversupply and weak demand. The Reserve Bank of Australia (RBA) has already cut its cash rate twice this year by 0.25% each time to 2%.
The Australian dollar has depreciated substantially against the US dollar – by 9.8% in the past year, which has helped cushion the Australian economy from the collapse in commodity prices by helping non-mining exports. However, the RBA is worried that the aussie’s depreciation to date has not been significant enough to rebalance the Australian economy away from mining to other sectors. The RBA has therefore repeatedly called for a weaker exchange rate for the Australian dollar, supported by the fact that the aussie hasn’t fallen as much against other currencies, which has limited the benefit to exporters.
Economic growth came in unexpectedly strong in the first quarter as mining exports held up despite low prices and falling investment. Resource exports are expected to be weaker in the second quarter but there are signs that profits of non-mining businesses are on the up and service exports are also rising.
With signs that the global growth outlook is stabilizing as the recent downside risks from China and Greece/Eurozone dissipate, the RBA might be more reluctant to cut rates further in the coming months, especially if the aussie continues on its downward path. The overheated housing market in Sydney is another concern for the RBA. But with falling business investment and a false recovery in the labor market, which has been aided by a fall in net migration, the RBA left the possibility of further cuts open in its latest meeting minutes.
The New Zealand economy has faced similar pressure from weak commodity prices as well as falling dairy prices. First quarter growth slowed to just 0.2% quarter-on-quarter and the Reserve Bank of New Zealand (RBNZ) cut its overnight cash rate for the first time since 2011 as the inflation outlook worsened. The kiwi has fallen considerably against the US dollar, falling to 6-year lows.
The RBNZ is expected to cut rates again when it meets on Thursday by another 0.25%, following a similar cut in June. But New Zealand’s Prime Minister, John Key, took markets by surprise on Tuesday when he said that the New Zealand dollar has fallen “further and faster than anticipated”.
The kiwi jumped by 0.9% against the US dollar after the comments and has since climbed to 0.6612. The New Zealand dollar also managed to rally against the aussie, which fell to 1.1146 against the kiwi. The Australian dollar meanwhile continues to trade near 6-year lows but was firmer in mid-European session at 0.7376 against the greenback.
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