Could the rampaging Australian dollar cause rates to fall?

Australian dollar reserve bank interest rates 2020
The Reserve Bank board will meet on 4 February to make a decision regarding interest rates.

One of the surprises that struck late last year was a resurgence in the value of the Australian dollar.

After dropping below the US70c in May last year, many analysts were thinking it would stay below that area – hopefully well below – as part of Australia’s slow progress back towards full employment and rising wages and economic growth.

Australian dollar chart January 2020 interest rates
Australian vs US dollar 10 year chart.

It wasn’t to be and the Aussie dollar has now briefly popped its head above US70c and is staying around that mark as the ceasefire in the US/China trade war shines a light on countries that will benefit from peace between the world’s two biggest trading nations.

Dollar responds quickly to good trade news

Australia is somewhere near the head of that list so the dollar has responded quickly, but the strength in the currency has come at a particularly difficult time for the Reserve Bank, which is hoping that it can escape the current muted growth quagmire and increasing inflation without resorting to extraordinary measures such as zero interest rates, quantitative easing or money printing.

The first milestone to keep an eye on is the Reserve Bank board meeting on 4 February, which will decide whether to leave official interest rates at their current level of 0.75% or lower them to an unprecedented 0.5%.

Dollar will play into rates decision

While the dollar won’t be central to that decision – employment, wage rises, prices and economic growth will take central stage – it will be a worrying side issue with the potential to do some damage to Australia’s economic bright spot of a strong export sector.

So, the level of the dollar will certainly be a talking point for the RBA board, given than net exports and government spending were the main factors keeping economic growth positive in the fourth quarter of last year.

Farmers will want a lower dollar

Drought stricken farmers will also be hoping for a lower dollar, given that they are not in a strong position to start with and agricultural prices are not nearly as strong as those for metals and minerals.

RBA Governor Dr Philip Lowe has said that he is prepared to cut rates again but he is also hoping that last year’s rate cuts will stimulate the economy by encouraging home owners to loosen their purse strings.

Record high debt levels and stagnant wages have so far stymied that sort of consumer recovery but the RBA will be looking for signs of some recovery and is also hoping that the Australian Government will heed some of its advice to stimulate the economy by spending more on infrastructure and productivity enhancing reforms.

At the moment, markets are slightly inclined towards the RBA deciding to keep rates steady in February but that could change between now and then.

And you can bet that the level of the Australian dollar will be one of the factors feeding into that decision.

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