The surprising strength of the US dollar this year has caused strategists to reduce their Aussie dollar forecasts, adding to the risk of sticky inflation.
Already a subscriber?A powerful rally in the greenback has caught foreign exchange markets off-guard, potentially delaying a recovery in the Australian dollar which could present a fresh headache for the Reserve Bank of Australia’s inflation battle.
Morgan Stanley highlighted that import price disinflation has been important in lowering Australia’s headline consumer price index over the past year. That means broader weakness in the local currency would complicate the RBA’s task of bringing inflation back to target. This has different sensitivity across industries, according to Morgan Stanley. Export volumes typically increase more in services and manufacturing when the Aussie dollar falls, but volumes in the resources sector are relatively insensitive.Overall, a 10 per cent depreciation in the local currency is estimated to boost GDP by around 1.5 percentage points over two years.
“We are currently still 2 per cent above this level and so do not expect immediate concern from the RBA,” said Morgan Stanley equity strategist Chris Nicol.The US dollar’s rally has also created headaches for countries across Asia, particularly its gains of 9.6 per cent against Japan’s yen and 6.5 per cent versus South Korea’s won.
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