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Aussie Dollar Weak? Its Central Bank Doesn't Think So

Sha Ying | CNBC

The Australian dollar is down over 11 percent so far this year and is the second worst performing major currency in the world after the yen, but for the country's central bank, it's still not weak enough.

In a statement accompanying its decision to keep interest rates on hold on Tuesday, the Reserve Bank of Australia (RBA) said that while the Aussie dollar has depreciated around 10 percent since early April, it remains at a high level.

"It is possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy," the RBA said. As a result, the Aussie dollar fell to an Asian session low of $0.9155.

(Read More: Australia Central Bank on Hold, Says Currency to Fall More)

Analysts tell CNBC that talking down the currency works for the RBA as it allows the central bank to stimulate the economy without actual monetary easing.

"I think they'd [the RBA] be quietly happy if the Aussie goes down, because they no longer have to cut interest rates and if the currency settles somewhere in the mid-80s or low 80s, they'd be very happy," Kumar Palghat, director of Kapstream, which runs fixed income funds, said.

Matthew Circosta, economist at Moody's Analytics said he thinks the RBA's cutting cycle is over, because of the continued weakness expected in the Australian dollar, bringing it back in line with fundamentals.

"The key for the Aussie dollar is that it's going to be much lower in six to 12 months than it is now," Circosta said. "It was stubbornly stronger in the last 12 months, even though commodity prices had fallen, interest rates were being cut, and China was slowing."

The likelihood of tapering of quantitative easing in the U.S. has also resulted in sharp falls in the Australian dollar since April when it hit $1.04, sparking downgrades by major banks like Goldman Sachs.

(Read More: Goldman Warns of Big Move in Australian Dollar)

The RBA, meanwhile, also maintained its easing bias on Tuesday, keeping the door open to further interest rate cuts even though it has only cut rates once this year by 25 basis points in May.

Kieran Davies, economist at Barclays said he expects the RBA to stay on hold for an extended period of time and maintain its easing bias to keep the pressure on the Aussie.

"Although it is hard to quantify the impact of the lower exchange rate on the economy, our work suggests that a 9 percent drop in the exchange rate has about the same effect as a 100 basis point rate cut, while the RBA's own dated research shows an even looser trade-off of 18 percent on the currency equaling a 100 basis point cut," Davies said in a note.

A weaker Australian dollar is a big benefit for Australia's struggling miners as their exports are priced in U.S. dollars. For example, every U.S. cent that the Aussie falls is worth 100 million Australian dollars to the bottom line for BHP Billiton, Reuters reported.

(Read More: Weak Aussie May Have Done the Job for RBA for Now)

Palghat of Kapstream added that the RBA has taken an "insurance policy" based on the Australian dollar.

"Critical thing is to watch the Aussie dollar, not the RBA. As long as the currency keeps going down, I don't think the RBA is going to do anything," he said.

- By CNBC.com's Rajeshni Naidu-Ghelani; Follow her on Twitter @RajeshniNaidu

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