Currency analysts are scrambling to adjust their predictions for the Australian dollar after its rapid rise against the falling US greenback in recent weeks.
Just when they thought they had worked out where it was heading the dollar ran out of puff on Friday – much to the relief of farm sector traders.
The currency, which briefly touched US80 cents mid-week, had risen almost 10 per cent against the US dollar since starting this year near US72 cents.
Back in autumn many currency experts were still tipping our dollar to be trending in the export-friendly range below US74c for much of this year.
The Australian Bureau of Agricultural and Resource Economics and Sciences expected an average trade around $US74c into 2018-19 and beyond.
RBA disuades hike talk
Some explanation for the recent jump has been attributed to fresh money market speculation of a Reserve Bank of Australia (RBA) interest rate rise – possibly as much as 2pc (to 3.5pc) – in line with recent talk of rising rates overseas.
However, the central bank has hosed down that expectation saying there was no automatic reason for rates to rise in line with recent hawkish increases and lending controls by policymakers in Europe and Canada.
The dollar quickly retreated to about US78.7c on Friday after RBA deputy governor, Guy Debelle, indicated the reserve bank was not keen to lift official interest rates given such action was likely to make the exchange rate less helpful to exporters.
Dr Debelle said while global influences, including monetary policy settings in other economies, had a significant impact on how the RBA decided the right policy rate levels for Australia, "they are, in the end, only one of a number of considerations".
The fact that other central banks increase their policy rates does not automatically mean the policy rate here needs to increase
- Guy Debelle, Reserve Bank of Australia
"Just as the policy rate in Australia did not need to decline to the very low levels seen in other parts of the world, the fact that other central banks increase their policy rates does not automatically mean the policy rate here needs to increase," he said.
Until this week Commonwealth Bank of Australia (CBA) had anticipated the dollar would currently average about US76c, riding up to US78c by year’s end.
However, CBA’s agriculture strategy director, Tobin Gorey, said the sharp weakening in the US dollar was now eating away at the ground gained by the greenback during 2014-15.
Multiple pressures on Aussie
“Weakness in the US dollar, coupled with some strength in our hard commodity markets, and the increased prospects of an interest rate rise later in 2017, rather than 2018, may have altered the picture for our dollar,” Mr Gorey said.
“Strength in commodity markets like iron ore is almost twice as likely to drive the dollar upwards than a slight interest rate rise.
“We’re taking another look at our forecasts for the rest of this year.”
Who’s hurting?
Mr Gorey said the past month’s rising Australian dollar trend had probably hit the beef industry more than most in the farm sector, partly because it coincided with cooling saleyard prices, rising stockfeed costs and drying seasonal conditions.
Wool returns would likely feel the cost of the higher exchange rate, too, but the shortage of wool available for sale and solid demand would probably act as a buffer against any notable cut in auction earnings.
Fortunately for Australian exporters other key competitor currencies including the Canadian dollar, the Brazilian real and the euro have also risen as the US dollar slipped.
Dairy Australia’s trade and industry strategy manager, Charles McElhone, said while dairy exporters did not want a rising Aussie dollar to erode the slow gains now emerging for global milk product prices, particularly butter, unfriendly currency movements were expected.
“There’s a pretty clear recognition in the dairy industry that today’s world market is much more volatile, so increasingly sophisticated trading mechanisms are adopted by exporters to cope with these changes as best as possible,” he said.
“With only 10pc of all milk production traded around the world, many factors can send export earnings fluctuating.
“Yes, we’d be much happier with the dollar at US75c, but at 78c or 79c it’s still much better than the exchange rate we had near parity (with the US dollar) a few years ago.”