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Triple whammy sends Aussie dollar below US93c

Canberra Times logo Canberra Times 20/05/2014 Bianca Hartge-Hazelman
The Australian dollar had been trading in a tight range recently before retreating overnight. The Australian dollar had been trading in a tight range recently before retreating overnight.

The Australian dollar has dropped below US93¢ for the first time in two weeks on the back of a triple whammy of news, including jawboning by the assistant governor of the Reserve Bank and a dig at economists for being largely unable to correctly forecast exchange rate moves.

Speaking in Adelaide on capital flows and the Australian dollar, the RBA's Guy Debelle said the local currency was likely to decline given an overall drop in foreign capital flows into Australian assets, mostly as a result of the resources sector moving into the production phase.

He said that while Japanese investors and central banks have been large buyers of Australian government bonds since the financial crisis, net capital flows were set to come off and so too would the dollar.

"This would help in achieving balanced growth in the economy. That said, the ability of economists to forecast exchange rate movements is notoriously poor, but at least this might give you some idea of some of the dynamics at play in the period ahead," he said.

His comments come just a week after currency experts at the country's biggest bank, Commonwealth Bank of Australia predicted a return to parity against the US dollar next year.

The dollar slipped below US93¢ this afternoon for the first time in two weeks, to trade at US92.96¢. Shortly after the release of the RBA's minutes from its May board meeting, the Australian dollar was buying close to US93.02¢, compared with US93.7¢ yesterday afternoon.

In its statement on monetary policy, the RBA noted that "overall growth in coming quarters was likely to be below trend given expected slower growth in exports, the decline in mining investment and the planned fiscal consolidation."

The fall follows an overnight drop in the local currency during the New York trading session in response to concerns about Australia possibly losing its AAA credit rating and worries that Chinese demand may be slowing for steel-making materials such as iron ore. The price of iron ore fell overnight to under $US100 a ton for the first time in two years.

The RBA also said that given the "outlook for the economy and the significant degree of monetary stimulus already in place to support economic activity, the board considered that the current accommodative stance of policy was likely to be appropriate for some time yet".

The RBA refrained from trying to talk the Australian dollar lower, given that it has seen some signs of rebalancing occurring in the domestic economy particularly in housing.

HSBC chief economist Paul Bloxham predicted earlier that this would be the case given that "without an easing bias it may also be harder for the RBA to credibly jawbone the Australian dollar (AUD) lower".

In a note to investors, Mr Bloxham added that a higher Australian dollar (AUD), particularly in the face of falling commodity prices, is likely to slow the process of rebalancing growth and help to put downward pressure on inflation, which could see the RBA keeping its cash rate lower for longer.

The safety of Australia's AAA credit rating has also been brought into doubt. Last Tuesday's federal budget had little impact on the Australian dollar, but ratings agency Standard & Poor's has since warned that Australia's highly prized AAA credit rating could be at risk if the government doesn't do more to reduce the deficit.

The AAA rating has been a key plank of support for the local currency because it serves as reassurance to foreign investors that Australia is a stable place to invest.

Some investment experts suggest the dollar could fall below US90¢ this week due to softness in commodities.

"We maintain our view that AUD/USD will remain US87¢ to US94¢ in the short term and then track down to mid 80s," said Baillieu Holst quant strategist Mathan Somasundaram. "We need to see substantial US or China growth risk for currency to break the recent trading pattern ... currently on 93.5 cents."

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