The RBA must cut the cash rate by 100 basis points by next year
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The Reserve Bank has no choice but to join the currency debasement contest that’s now going on around the world, and to cut rates by another 1 percentage point in the coming 12 months – including 0.5 percentage points by the end of the year.
The Australian dollar is in a 'no lose' situation: when Western central banks launch asset buying programs, as the central banks of the US, Europe, UK and Japan have all done lately, the 'risk on' environment sees the Aussie rise as a result of fund buying; but Australia’s AAA status and relatively high yield makes it a preferred safe haven as well, especially for other central banks.
Last week the RBA published a list of 16 global central banks that have been buying Australian dollars as part of their diversification strategy, including Russia, Brazil, Korea and Switzerland. On Thursday the Philippines was added to the list.
The result is that as the Chinese economy slows, commodity prices fall and with them Australia’s terms of trade, while the exchange rate has remained stubbornly above 104 US cents.
In other words, the dollar’s unique status as risk asset for hedge funds and safe haven for central banks means that it is no longer doing its usual job of buffering the Australian economy from an Asian or global downturn, as it did in 2001 and 2008.
This morning it is trading at 104.5 US cents, having slipped from its post-third-quarter high of 106.26.
What to do? Well, in March, when the dollar touched 108, the RBA started to sell more dollars than usual and talked the currency down.
Then on May 1, with the dollar still above 104, it shocked the market with a bigger than expected cut of 50 basis points and followed up with another 25 points in June. The dollar instantly fell to 103.3 on May 1 and then kept falling, bottoming at just below 97 US cents a month later before climbing to 106 in August on the back of speculation about European and US quantitative easing programs.
Since then the risk-on trade, the interest differential and central bank diversification has kept it above 104.
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