“Twenty years ago the Australian dollar was mocked as the South Pacific peso; now it’s the southern Swiss franc: a globally recognised safe haven,” Gerard Minack and Katie Hill at Morgan Stanley tell FTAlphaville.
The ‘Aussie’ hit a five-month high this week, pushing above $1.1060 after the Reserve Bank of Australia (RBA) said it would leave interest rates unchanged. It’s now not far off the 30-year high of AUS$1.1080 against the US dollar that it reached last year. The world’s fifth-most traded currency has jumped by 8.3% since the central bank cut rates on 5 June to 3.5%. Overall, it is up a staggering 75% from its post-Lehman Brothers lows in 2008. The rebound comes despite falling commodity prices, driven by the slowdown in China, Australia’s biggest trading partner.
The strength has been ascribed to the fact that the Australian economy is still growing strongly, with GDP up 4.3% in the year to March. Interest rate cuts of 75 basis points in May and June boosted consumer spending and house prices, notes Bloomberg. Another AUS$2bn in government carbon rebates and benefit payments since May have also helped. Meanwhile, inflation remains low, and Australia’s government bonds are AAA-rated, encouraging ‘safe-haven’ seekers.
However, the Aussie’s strength is hurting the country’s non-mining industries, such as tourism and manufacturing. Reports last week showed that the services industry contracted for a sixth consecutive month in July, says Bloomberg. Indeed, the Aussie’s “persistent strength”, says Neil Hume on FTAlphaville, has sparked calls among some economists for intervention. Former RBA board member Warwick McKibbin argues in the Financial Review that the bank should print more dollars (to bring their value down) and sell them to foreign banks in exchange for assets.
But will the RBA step in? “We doubt that the RBA is currently minded to become the South Pacific counterpart of the Swiss National Bank and… intervene without limit to prevent the Australian dollar from appreciating above some chosen level,” Saul Eslake, chief economist at Merrill Lynch in Australia told The Wall Street Journal.
While the RBA has previously intervened – supporting the Aussie in 2008 after the Lehman collapse – the National Bank of Australia claims the RBA will only act if it sees an increase in foreign exchange market volatility and there is “little evidence” of a “disorderly market”. But, as Hume notes, it remains to be seen how long Aussie strength can last “in the face of falling commodity prices”.