The Australian dollar has performed pretty poorly against its US counterpart over the past 12 months on the back of rate cuts from the Reserve Bank of Australia and problems with the Chinese economy and now it faces another challenge against one of the world’s major currencies, the British pound.
The Pound to Australian Dollar exchange rate yesterday hot a new 3 year high on expectations that Prime Minister Boris Johnson and his Conservative party will win the December 12 election with a comfortable majority and quickly deliver Brexit which will end years of uncertainty that has hung over the British economy.
This uncertainty many say,has kept the British pound under the weather for some time and the currency would have been significantly higher as behind the scenes, the British economy is holding up quite well.
The news for the Australian economy is not so rosy and although the RBA may not cut rates any further this year, more rate reductions are on the cards according to one analyst and the ywill begin in February.
“We have included an additional 25bp cut to the cash rate in our rate track. We now expect cuts in both February and June 2020 - taking the cash rate to 0.25%. At this point, we see an increased risk of a move to ‘unconventional’ policy in H2 2020 should the labour market deteriorate more significantly than we forecast,” says Alan Oster, chief economist at NAB, Australia’s largest bank.
Weak growth in the private sector will lead to higher unemployment and slower wages growth for Australians in the year ahead, which is tipped to further entrench the existing weakness in the quarterly inflation numbers. Once the RBA has cut the cash rate to 0.25% next June it will have no choice but to begin thinking seriously about a currency-crushing quantitative easing QE program.
The QE program would be similar to the one introduced in Europe to boost the economy which has seen the bloc’s interest rate hit zero and although nobody predicts the RBA will reduce rates this far, the thought that it may happen will weigh on the Australian dollar.
Some of the biggest fund managers are already gearing up for a QE program by adjusting their portfolios accordingly such as Nikko Asset Management Ltd who are already buying assets on bets that interest-rate cuts won’t be enough to combat slowing economic growth. They see the impact of asset purchases rippling broadly through debt markets.
“QE could come even before any recession, it is definitely a scenario we have to prepare for. Everyone’s talking about QE” said Susan Buckley, QIC’s managing director for global liquid strategies.
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