Crumbling Aussie—Why Economists Aren't Worried
The rout in the Australian dollar continued on Monday falling to a 33-month low against the U.S. dollar, as the battered currency loses its high yield and safe haven appeal.
But economists tell CNBC that further pressure on the commodity currency is good news for the Australian economy, which has been held back by its strength.
Shane Oliver, head of investment strategy & chief economist at AMP Capital said that even if the Aussie falls to as low as 80 cents against the U.S. dollar - a drop of nearly 13 percent from current levels - this will be good for the economy.
"A move towards the end of quantitative easing in the U.S. will further reverse the upward pressure seen on the Australian dollar since 2009," Oliver said in a note. "It's good news for the Australian economy as the stubbornly strong Australian dollar has been a key factor holding the economy back recently."
Paul Bloxham, chief economist for Australia and New Zealand at HSBC, backed that sentiment saying a weaker Aussie dollar will help Australia rebalance its growth from the mining sector to non-mining "exchange-rate sensitive industries" like manufacturing and tourism.
"We've had a period of time where growth has been driven by mining investment in Australia and what we need to see is the other parts of the economy, outside of the mining sector start to take over as key drivers of growth," Bloxham said. "Low interest rates are helping do that, but a lower Aussie dollar is also going to help that rebalancing."
The Australian dollar fell to a low of $0.9155 on Monday, levels unseen since September 2010. It is also down more than 13 percent from a yearly high of $1.05 on a mix of tapering of stimulus in the U.S., falling commodity prices and a slowdown in Australia's largest trading partner China.
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The Australian economy, meanwhile, grew at a slower than expected pace of 0.6 percent in the first quarter from the previous one, which heightened fears that the risk of recession may be growing in the "lucky" country after 21 years of uninterrupted economic growth. Expectations of an imminent peak in mining investment, which fueled the Australian economy while many of its developed peers slipped into a recession following the global financial crisis, has also led to concerns of slower growth.
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Matthew Circosta, economist at Moody's Analytics, said that while a falling Aussie dollar does put the economy at risk of high inflationary pressures, right now the bigger upside is the currency boosting those sectors that had been struggling in the past because of its strength.
"We're certainly going to see a little more inflation pressure in the next 12-18 months with the currency falling and that's going to create a headache for the RBA [Reserve Bank of Australia] in 2014," Circosta said. "[But] that's an issue for down the track rather than near-term."
(Read More: Australia Holds Fire on Rates, but for How Long?)
Bloxham of HSBC expects the central bank to keep interest rates on hold at its meeting next week, because he thinks the low Aussie dollar is doing a lot of its work. The RBA left interest rates unchanged at a record low of 2.75 percent in June after a 25 basis point cut in May.
"In a way the Aussie dollar having fallen is probably doing a lot of the work for the RBA, so the RBA won't maybe feel that need to cut interest rates as much," Bloxham said.
A weaker Australian dollar will also make the country more attractive for foreign investment rather than detract from it, according to Circosta.
"It increases the attractiveness given it's cheaper for foreigners to invest in Australia and you're certainly already seeing some of that in the housing market," Circosta added.
- By CNBC.com's Rajeshni Naidu-Ghelani; Follow her on Twitter @RajeshniNaidu