(The Sydney Morning Herald)
The dollar on Wednesday touched a new eight-month low, after a slew of disappointing economic data sparked a market sell-off.
In late local trade, the Aussie was at US86.90¢, its lowest point since late January this year, after getting within US0.03¢ of a four-year low of US86.60¢ during the day.
Wednesday’s slide, sparked by anaemic domestic retail figures, disappointing factory data from China and signs of a cooling housing market, added to ongoing jitters about imbalances in the global economy.
Faster than expected recovery in the US and Britain, for example, is creating market volatility that is drawing foreign investors away from Australian financial assets such as bonds and shares.
At the same time, soft commodity prices have scared investors away from big mineral and agriculture exporters such as Australia.
As a result, the local currency has depreciated by 6.5 per cent against the greenback in the past month, although it remains one of the better-performing currencies over the long run. The currencies of other big commodity exporters such as Brazil have also come under pressure in recent weeks.
Economists say the local dollar could trade even lower.
“The US dollar is on a bit of a rampage and the Aussie is collateral damage,” said Commonwealth Bank currency strategist Joseph Capurso. “I think [the Australian dollar] is going to have an 85 handle on it before the end of the week.”
HSBC chief economist Paul Bloxham says his bank has long seen the currency ending this year near US86¢.
“We think the Aussie’s got a little bit more downside in the short run, but we would expect it to close out the year at not too far off its current level,” he said.
The local dollar’s recent decline should be welcomed by the Reserve Bank of Australia, which has been frustrated by the currency’s persistently high level when measured against conventional metrics such as the terms of trade – the difference between export and import prices – and differentials between interest rates across the world.
The RBA is reluctant to reduce the cash rate – which would drive the currency lower – because it could further inflate already overblown house prices in Sydney and Melbourne.
“The Aussie dollar doesn’t move every day or every month in line with fundamentals, but the fundamentals were already telling us that it should have been lower,” said Mr Bloxham. “And that’s why the RBA governor in particular had been out quite vocally saying he expected it to fall.
“The fall we’ve seen is really a correction for previous declines in commodity prices and narrowing in those interest rate differentials.”
The currency’s strength has complicated a much-needed rebalancing of the Australian economy away from its reliance on resource-related investment and mineral exports to a broader mix of economic activity.
Service exporters such as tourism and higher education operators can suffer when the currency is high, as can manufacturers competing with cheaper imports.
Agricultural and processed food exporters have also laboured against the stubbornly high local currency for years.