Aussie back to doing its job as ‘shock absorber’
The Australian dollar's stubborn strength at the start of the year has provided a hindrance to the economy, but recent declines show the currency once again fulfilling its role as a "shock absorber," a trend that is likely to continue for awhile, analysts told CNBC.
After remaining above parity to the U.S. dollar for the majority of the past two and a half years, the currency has tumbled over 13 percent against the dollar since mid-April, as on concerns of a slowdown in China, its biggest trading partner.
Analysts say that by staying weak, the Australian dollar is helping to prop up the economy by boosting export demand, hence playing the role of a "shock absorber."
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"In the past three months, the Australian dollar has once again started to act as a shock absorber," read a HSBC Global Research note. "The fall is good for Australia's growth prospects, as it should support the export sectors and import-competing industries," said HSBC.
According to Andrew Salter, currency strategist at ANZ, the Australian dollar has a history of helping the economy in times of crises, and also in containing inflation during risk-on periods.
"When you look at the past 25 years, there have been very few occasions when the currency failed to play its role as a global shock absorber," said Salter. "But in recent years it hasn't as much. For example in 2012 it traded a little above fair value, at a time when it needed to be below fair value," said Salter.
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However, Salter added that in recent months the Australian dollar has started to play this role again.
"Right now the weakness is having an important impact on the economy and helping stimulate manufacturing, which provides a boost to the job market, and for tourism, helping make Australia's industry more internationally competitive," he added.
HSBC's report gave the examples of three major crisis events, including the Asian financial crisis of 1997, the tech bubble of 2001 and the global financial crisis of 2008, when the Aussie fell sharply and in the process, helped support local growth. Similarly, amidst periods of rising commodity prices and faster global growth in 2003, 2006 and 2010, a strong Australian dollar helped curb inflation.
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Although Australia's economy held up relatively well following the financial crisis of 2008, worries over an end to the Australia's mining investment boom and a slowdown in its major trading partner China has fueled concerns in recent times.
According to HSBC, the decline in the Aussie's strength over the past three months will contribute between 0.2 and 0.4 percent to gross domestic product (GDP) growth in 2013. Its forecast is for Australia to grow 2.5 percent this year.
ANZ's Salter said he expected the currency to continue weakening in the coming months.
"There are two reasons why Aussie weakness will continue: one is that expectations for tapering will continue to strengthen the U.S. dollar, and the second is that China, which Australia is very exposed to, will continue to soften," he said.
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But Emma Lawson, senior currency strategist at National Australia Bank, said the currency, which traded at $0.9163 on Thursday in Asia, was still above where it needed to be to provide a real boost to the Australian economy.
"It is still well above the long term average and is still a little bit of a headwind. Though it has gone some way in helping the economic outlook, I don't think it has made its full adjustment yet," she said, adding that NAB saw the Aussie weakening to 0.88 to the dollar by year-end.
—By CNBC's Katie Holliday: Follow her on Twitter