Why the Weakening US Dollar Spells Bad News For the RBA’s Monetary Policy

The Australian dollar has continued its recent upward trend against the US dollar. This morning the AUD was trading at $0.81 against the greenback.

And it only comes as further confirmation that last week’s 0.25% rate cut failed to achieve its stated objective.

The RBA are keen to drive the AUD down closer to $0.70. It’s assumed that would be the tonic to spur economic expansion.

It’d help exporters’ competitiveness, that’s for certain. Depreciated currencies allow exporters to sell goods for cheaper. But beyond that it’ll just push up inflation. Indirect stimulus spending through lower interest rates doesn’t help economic fundamentals in the long run. It just sets us up for crushing debt accumulation.

So the RBA is at the mercy of its US counterpart at the Federal Reserve. That’s because the US dollar is single-handedly curtailing the RBA’s monetary policy.

The strength of the US dollar is the only thing that will affect the Aussie dollar in the short to medium term. The further the USD falls, the higher the AUD will rise — and vice versa.

The point here is that the RBA are, for better or worse, relying on the US Fed to suppress the Aussie dollar’s rise by lifting US interest rates.

Right now the RBA has its hands tied. Until the US economy improves, US rates aren’t likely to rise. That means the USD will remain flat, or fall further.

Why the US dollar may not rebound in 2015

The US dollar’s fall is mostly down to market speculation over recent US economic data.

Poor retail figures during April added to lacklustre first quarter figures. Overall retail spending was down 0.2% in April. More worryingly it’s come on the back of lower unemployment and cheap petrol prices.

Lower US unemployment seemed to be a sign that business was picking up. But as always, economists parroting the official line failed to ask the real questions.

While 223,000 jobs were been created in April, few people asked the real questions. Where they full time jobs? Part time? Casual? The Fed doesn’t care. They’re content to point to better figures as a sign the economy is growing.

And how do we account for people who have stopped looking for work? Officially they aren’t considered part of the workforce.

Yet both of these factors matter for retail spending. If you’re earning a part time salary, or you’re not looking for work, you aren’t going to spend as much. What the 0.2% drop suggests is that the employment figures don’t quite reflect the current predicament the average US consumer finds themselves in.

None of this bodes well for the rest of the year. For the RBA it means that they can look forward to more bad economic data from the US to drive up the AUD.

Why the US won’t raise rates in June…and probably not until 2016

All of a sudden market predictions penning a rate rise in the US this year seem foolish. You’re certainly not likely to see it happen in June, which many economists had been predicting.

The US economy is getting worse — not better. You don’t raise rates when things are going bad. Lowering rates is meant to stimulate the economy. You do it when economic conditions look to be on the up, to put a leash on expansion.

That just means the RBA can forget about an improving USD helping their cause. The Aussie dollar simply isn’t going to hit $0.70 as long as the US dollar remains on a downward trend. And with no rate rise on the horizon in the US, the RBA finds itself stuck between a rock and hard place.

So the RBA will resort to the only thing it can do: lowering interest rates further. A cash rate of 1.75% isn’t far away. We may even see it as early as June. But whether that will be enough to offset the US dollar’s fall is another matter altogether.

Mat Spasic,

Contributor, Markets and Money

Markets and Money’s Greg Canavan doesn’t believe anything the RBA does will be enough to prevent the economy sliding into recession this year. In a free report, ‘Australian Recession 2015: Unavoidable’ Greg reveals how the RBA realises why economic hardship faces all of us. He’ll show you why government debt is at a crushing AU$300 billion — and why this means a recession is inevitable. Download your copy today and he’ll show you how you can protect your wealth from the imminent fallout.

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