RBA warns high dollar may slow growth

Weekly AUDUSD

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

"The higher exchange rate is expected to contribute to subdued price pressures in the economy", he said.

SYDNEY-Australia's central bank on Tuesday ramped up its warnings over recent strength in the Australian dollar saying it is becoming a potential brake on economic growth and prices.

'I would interpret the Governor Phil Lowe's speech last week as suggesting he's at least entertaining the possibility that for any particular rate of output growth. the inflation rate would be lower, ' he said.

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

Dr Lowe also said consumption remains a source of uncertainty for the economy.

The bank said in its statement: "Retail sales have picked up recently, but slow growth in real wages and high levels of household debt are likely to constrain growth in spending".

'The Australian dollar has appreciated recently, partly reflecting a lower USA dollar'.

He said the economy was still expected to grow at an annual rate of three per cent for the next few years but stressed that forecast may change should the Australian dollar continue to rise.

They're expected to show continued solid jobs growth in the USA with 180,000 new jobs created in July and a fall in the unemployment rate, coupled with subdued wages growth.

A strengthening exchange rate, Dr Lowe warned, "would be expected to result in a slower pick-up in economic activity and inflation than now forecast". Moreover, Lowe actually said in his statement the terms of trade are expected to decline "over the period ahead".

PMI's are now broadly range bound around the 53-4 level for all three sectors and they are expected to remain around those levels. In other words, the RBA's fortunes are hitched to those of the White House.

While this had been largely priced in by investors, the RBA's warning that the 'Aussie's recent strength has been placing pressure on the Australian economy caused the antipodean currency to relinquish almost all of its overnight gains. While some economists might argue high iron ore and coal prices justify a stronger Aussie dollar, the reality is mining companies aren't going to use the windfalls to invest and hire Down Under.

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". It pointed to a gradually improving economy, though rising household debt remained a concern.

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