Bassanese's Market Insights: $A still too high for the RBA | BetaShares

Bassanese’s Market Insights: $A still too high for the RBA

BY David Bassanese | 7 July 2015

The Reserve Bank of Australia’s (RBA’s) decision to leave official interest rates on hold in July was no surprise to the market. That said, there were some very subtle, but important aspects to the RBA’s post-meeting policy statement that investors should be aware of.

Keep watching the unemployment rate

For starters, the RBA has re-emphasised the importance it places on trends in the unemployment rate when trying to understand the economy’s performance. In its July Statement, the RBA did away with its previous detailed analysis of disparate trends in consumer spending, business investment and public demand.  Instead, it merely noted that the unemployment rate “though elevated, has been little changed recently.”

When there are clear divergent forces in the economy – as is the case today, with moderate consumer spending, strong housing construction but weak business investment and public demand – the RBA tends to fall back on trends in the unemployment rate, as the single best timely gauge of how the economy overall is traveling.  In this regard, the fact the unemployment rate has remained broadly steady in recent months – despite persistent below-trend economic growth – appears to have provided some comfort to the RBA, enabling it retain only a weak policy easing bias.

Indeed, the July Statement again excluded any reference to an explicit easing bias of the type seen earlier this year. In turn, that suggests the RBA is still not contemplating another interest rate cut anytime soon – even though August is one of the four “windows of opportunity” each year in which the RBA’s policy meeting comes just after the latest consumer price index report, and just before its quarterly  economic forecasting update contained in the Statement on Monetary Policy.

Of course, that could just mean the RBA is leaving itself leeway.  To my mind, it’s still possible the RBA could cut as early as next month if the Greek crisis worsens and/or the next CPI result is exceptionally low.  My base case at this stage, however, is that the RBA is likely to remain on hold for at least a few more months – which may make it a stretch for the Bank to cut twice more by year-end as my current forecasts imply.

That said, on the basis that even the RBA expects below-trend growth “for some time yet”, it’s hard to believe the unemployment rate won’t rise further. The Federal Government’s May Budget, for example, still forecast the unemployment rate will reach 6.5% by June 2016.

Even at US75c, the $A is still too high

Of course, the RBA is also hoping it does not need to cut interest rate further – lest it overly heat an already hot Sydney property market. In this regard, the RBA is hoping the $A will do more of the work required to stimulate the economy, by falling a lot further.  Indeed, even though the $A had by Wednesday morning weakened to a 6-year low of US 75c, the RBA still saw fit to suggest in its Statement that “further depreciation seems both likely and necessary”.  My long-held view has been that the $A will fall to US68c by year end – the most bearish forecast among 25 economists recently polled by the Sydney Morning Herald – remains firmly in place.

Investors wishing to express a view that the US$ will continue to rise against the A$ can do so using our U.S. Dollar ETF (ASX: USD), which aims to track the change in price of the United States dollar relative to the Australian dollar, before fees and expenses. For example, if the US$ goes up 10% against the A$ (i.e. the A$ falls in value) the ETF is designed to go up 10% too (before fees & expenses). More information on this ETF is available here.


  1. serop  |  July 8, 2015

    The Australian Dollar has fallen a lot so far,do you think overseas investing is still good,or not as
    compelling as it was when the Australian Dollar was higher? Would Australian Shares be a better
    investment seeing the dollar has gone down so much?

    1. David Bassanese  |  July 9, 2015

      Hi Serop

      Thanks for your question. Clearly the US dollar trade is less appealing than when I first started referring to it here at BetaShares around a year ago. That said, even at US75c or so the RBA still feels the $A is overvalued and would like to see it go lower. Our year-end target has been $US68c since February and mid mid-2016 I would expect a level around US65c – due to rising US interest rates and continued weakness in commodity prices. As for Australia vs. overseas equity I still favour international from a tactical perspective, but a good diversified portfolio should ideally have some of both – see our Global Market Review for our latest tactical thoughts. A weaker $A will eventually help the Australian economy and share market, but we still fave a pretty weak earnings outlook for a while yet.

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