RBA warns high dollar may slow growth

Weekly NZDUSD

"The Australian dollar above A$0.80 looks expensive, but without action from the central bank, yield differentials will continue to be the primary driver for the currency pair", said Hussein Sayed chief market strategist at FXTM.

However, with inflation sitting below the RBA's target of 2 per cent to 3 per cent (at 1.9 per cent), combined with ongoing concerns about sluggish wage growth (also at 1.9 per cent) and a stubbornly strong Australian dollar sitting just shy of 80 USA cents, the RBA board had no choice but to leave rates on hold.

Higher commodity prices, weakness in the USA dollar and some lingering speculation that the RBA might take a more hawkish view on policy are among the factors lifting the Aussie dollar. In his accompanying statement, Lowe said while the bank was sticking to its quarterly forecasts - which will be updated in three days' time - he also made it clear that further Aussie ascension will slow the track of economic growth and inflation. "The higher exchange rate is expected to contribute to subdued price pressures in the economy", Mr Lowe said.

On the data front, it's an avalanche next week but one to watch is the Reserve Bank board meeting on Tuesday.

The Dow Jones was up 34 points but U.S. tech stocks dragged the broad S+P 500 down 0.1 per cent thanks to Amazon's weaker than expected results on Thursday night.

A higher exchange rate means both its exports comparatively more costly.

As had been widely predicted by economists the central bank voted to again leave interest rates on hold in their August meeting. The unemployment rate is expected to decline a little over the next couple of years.

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While retail sales have recently rose, slow growth in real wages and huge household debt may possibly restrain the increase in spending.

'I would interpret the Governor Phil Lowe's speech last week as suggesting he's at least entertaining the possibility that for any particular rate of output growth. the inflation rate would be lower, ' he said.

Despite the bank's concern over recent strength in the Australian dollar, the broader economy has improved in recent months. Some pick-up in non-mining business investment is expected.

But monthly house price data yesterday from Corelogic showed that prices in Melbourne had risen by 3.1 per cent in July while Sydney prices jumped 1.4 per cent and Canberra was up 2.4 per cent. Brisbane prices fell but the average capital city price rise for the month was 1.5 per cent.

There is also likely to be a short-term pick up in inflation, as measured by the consumer price index, as higher electricity and tobacco prices flow through.

And he did point to the disturbing trend that "growth in housing debt has been outpacing the slow growth in household incomes". A factor working in the other direction is increased competition from new entrants in the retail industry.

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