The Australian dollar came under fire last week, hitting a new 6 year low as the US economy gathers momentum and a speech by Reserve Bank of Australia Assistant Governor Christopher Kent, who noted that the Aussie currency was still relatively high in light of the economic situation in Australia.
The Australian dollar briefly hit US75.58c, its lowest level since 2009 with further falls expected in the coming months as pressure grows on the RBA to further cut interest rates in order to kick start the flagging economy.
Mr Kent noted that earlier, the Australian dollar remained relatively high even though some sectors of the economy were contracting with the local currency failing to follow suit causing the economy to go out of whack.
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“The earlier substantial appreciation of the Australian dollar in response to very high prices for our commodity exports was a signal for labour and capital to move into the resources sector. But for a time, the Australian dollar stayed high even after mining investment and commodity prices began to turn down. That meant that it was not playing the usual role of helping to rebalance growth towards other parts of the economy”. he said
He also noted that the recent depreciation of the Australian dollar was starting to have an effect as more and more Australians kept their money at home, as the prices for locally made goods drop and exports become considerably cheaper making Australia competitive on the world stage.
“Australians and foreigners will direct more of their spending to Australian produced goods and services (such as tourism and education) as they become relatively cheaper compared with the alternatives available offshore. Along the same lines, the depreciation has lowered the level of Australian wages when measured in foreign currency terms; since April 2013, they are 30 per cent lower in US dollar terms”. he also noted
On a final note, he mentioned that although the RBA was pleased with the recent drop the currency still has further to fall,
“While the depreciation seen to date will be helpful, our assessment is that our exchange rate remains relatively high given the state of our overall economy”. he said.
Stephen Miller, the Sydney-based head of Australian fixed income at BlackRock is one of the more bearish analysts towards the Aussie dollar and noted that he expects the currency to fall to US70c in the second half of the year, as the RBA is forced to slash interest rates by another 50 basis points to a record low of 1.75% to boost growth.
“We anticipate further rate cuts; we’re seeing significant declines in the prices of Australia’s commodity exports, If we put all those things together, we could well see the Aussie dollar down towards US70 ¢ in the second half of this year.” He said.
Australian households are carry more debt than any other country in the world according to research by Barclays which may come back to haunt them in the event of another global financial crisis.
Barclays chief economist for Australia Kieran Davies says private sector debt-to-income gearing is currently at an all-time high of 206 per cent, putting Australia close to the top 25 per cent of the world when it comes to leverage.
“Examining the distribution of household debt, Australia has the highest gearing of our large sample of countries, although it was practically a tie with Denmark (129 per cent of GDP),” Mr Davies noted”.
“Switzerland (120 per cent) [and] the Netherlands (115 per cent ) were the next closest countries.”
“With high levels of leverage by world standards, where debt is concentrated in the household sector, we see this as a vulnerability in the event of another global shock,” Mr Davies added.
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