Strong dollar imperils economy and jobs, RBA warns

Posted August 03, 2017

The Reserve Bank of Australia (RBA) said it expected the higher exchange rate between the Australian dollar and its United States counterpart was expected to keep price pressures subdued but was also weighing on the outlook for output and employment.

The higher exchange rate is likely to contribute to subdued price pressures in the economy.

However the uptick in the Australian Dollar proved to be short lived last night following the conclusion of the Reserve Bank of Australia's (RBA) latest monetary policy meeting. Headline inflation rates have declined recently, largely reflecting the earlier decline in oil prices.

One bright spot for the economy is the prospect of recovery in business investment spending.

"The Australian dollar has appreciated recently, partly reflecting a lower United States dollar".

The Australian Dollar extended its gains from Monday following better than expected Chinese Manufacturing PMI data from Caixin.

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"What's more the strength in the Australian dollar will only put more downward pressure on inflation".

Higher commodity prices, weakness in the USA dollar and some lingering speculation that the RBA might take a more hawkish view on policy are among the factors lifting the Aussie dollar. Higher prices for electricity and tobacco are expected to boost CPI inflation.

The Australian bonds remained flat Wednesday as investors remained sidelined in any major trading activity ahead of the Reserve Bank of Australia's (RBA) quarterly statement on Friday, which will provide updates on key economic indicators such as gross domestic product and inflation. Housing prices have been rising briskly in some markets, although there are some signs that these conditions are starting to ease. In other words, the RBA's fortunes are hitched to those of the White House.

A higher exchange rate means both its exports comparatively more costly.

He adds that there are two schools of thought about this, with the first composed of optimists, for whom, "the strength of the service sector, representing 80% of the economy, shows the underlying resilience of growth with services now 2.3% bigger than a year ago", whilst pessimists argue that the, "falls in production output are being masked by a short-lived expansion of services that's doomed to fall victim to the real income squeeze".

RBC capital markets are bullish the Aussie versus the Pound as, "Absent any shift in rate expectations, our default position remains to buy dips in AUD as the outright yield continues to draw in investors while volatility and global yields remain historically low". Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

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