Australian Economy

Aussie falls into line

Steep declines in the currency may be just the start as Australia's central bank flags rate cuts in the face of strains in the resources-led economy

PUBLISHED : Thursday, 06 June, 2013, 12:00am
UPDATED : Thursday, 06 June, 2013, 4:15am

The biggest depreciation among major currencies is not enough to satisfy the Reserve Bank of Australia, which is signalling a readiness for further cuts in interest rates.

RBA governor Glenn Stevens, speaking as his board left borrowing costs unchanged at a record-low 2.75 per cent on Tuesday, said the inflation outlook gave him scope for further easing and the exchange rate "remains high".

The Australian dollar has slid 7.7 per cent in the past quarter. It was trading at 96.14 US cents yesterday and, despite the decline, remains the world's most overvalued currency at 29 per cent above purchasing power parity.

Economic growth slowed in the past quarter to the weakest pace since the three months to June 2011 as the crest of the mining investment boom nears, government data showed yesterday .

Weaker demand in China, the nation's biggest trading partner, is also boosting bets for rate reductions. Swaps markets indicate the central bank will cut its benchmark by November.

"They made it clear that despite the fall in the aussie, it still remains a weight on activity," said Gabby Hajj, an economist at Macquarie Group. "There's a slew of data that suggests that things aren't really picking up. They still seem concerned with where the economy is going, so they still have an easing bias."

Macquarie, Australia's biggest investment bank, says the RBA's cash-rate target will be at 2 per cent by the end of the year.

The economy grew at a 2.5 per cent annual pace, the Bureau of Statistics said yesterday, weaker than the 2.7 per cent median forecast in a survey of economists. Declines in machinery and equipment investment offset a gain in household spending, the data showed.

Reports in the past week showed capital expenditure unexpectedly slumped in the first quarter, while retail sales grew less than expected in April and job listings declined last month by the most this year. The jobless rate is at 5.5 per cent, having touched 5.6 per cent in March, a level it had not reached since November 2009.

The aussie ended its record run above parity last month and touched 95.28 US cents on May 29, the weakest since October 2011. Even after dropping from this year's high of US$1.0599, it remains 27 per cent above its average of 75.73 US cents since exchange controls were scrapped in 1983.

"The aussie has come down and that is welcome from the RBA's perspective, but they expected it would do so," said Sean Keane, an analyst in Auckland at financial advisory Triple T Consulting. "Had it not declined, they would have had an issue, and if it doesn't continue to fall, then they will need to give it a push."

The aussie was 33 per cent above the level implied by purchasing power parity at the start of this quarter, according to data based on changes in consumer prices and average exchange rates.

Australian government bonds delivered a 0.8 per cent return to investors since March 31, the largest gains among the 11 nations holding AAA grades from all three major ratings companies, Bank of America Merrill Lynch indices show.

The nation's 10-year government bond yield fell 2 basis points to 3.43 per cent, or 128 basis points more than similar-maturity treasuries. The premium shrank to 116 on May 28, the least in 4½ years.

Tuesday's decision by the RBA was accompanied by the shortest statement since October 2010. The text omitted direct mention of China for the first time since July 2011.

"The RBA clearly felt that very little new information was at hand, and therefore very little needed to be said," said Keane, who likened Stevens' statement to a Twitter posting.

With a government report last month showing capital spending in the resources industry is at its peak, the economy must rely more on other sources of demand.

The aussie's slide has come too late for some international and domestic icons, with Ford Motor shuttering factories and surfwear company Billabong International cutting earnings forecasts and contemplating asset sales to repay debt.

Ford said on May 23 it would close its Australian manufacturing plants in October 2016, resulting in 1,200 job losses. Billabong, whose market value reached A$3.84 billion (HK$28.7 billion) in May 2007, was worth A$110 million on Tuesday after its stock fell 49 per cent in the wake of failed takeover talks.

"If you take a balance of all the RBA comments over the last two years, it's become quite obvious that the RBA would be more comfortable with a currency level that's between 90 and 95 cents," said Andrew Lilley, a rates strategist at UBS.