Australian dollar hits lowest point since GFC - experts react

The Australian dollar fell to US77.17¢ overnight on the back of strong US jobs data, hitting values not seen since the GFC in 2009.

The currency recovered slightly over the course of last Friday morning, tracking at around $US77.85¢.

The fall comes in the lead-up to the Reserve Bank of Australia’s February meeting, at which some are expecting a decision to reduce the cash rate or a hint that a cut is on the cards for early 2015.

Here, our experts give their insights on what happened to the Australian dollar and why:

The Australian dollar (AUD) has been overvalued since the GFC because of quantitative easing and low rates in other advanced economies, and resultant carry-trade-type flows that pushed the currency up. While we haven’t seen much change in policy in advanced economies, the prospect of rising rates in the US has seen the AUD fall, along with weakening commodity prices and global economic growth.

An overvalued exchange rate is bad news for the economy, so the return to something near fundamental fair value, in the 70-80¢ range, is good news. Volatility is usually a problem for some businesses, so at the moment expect some companies that have not hedged against a falling Australian dollar to report some bad results. It is also of course bad news for travellers overseas, but good news for travellers to Australia and for tourism.

In short, this is mostly a good news, not a bad news, story.

The next months may well be a period of volatility for the Australian dollar. At the moment, the market wonders whether the RBA will follow other central banks to ease monetary policy conditions, but I think on balance this is unlikely. In my view, monetary policy in Australia is likely to remain stable - but we may well see the Australian dollar bounce around in the lead-up to the announcement next Tuesday.

While the lower Australian currency improves the prospects for many of our exporters, international conditions are unsettling the market, leading to uncertainty and hence volatility. However, we have shown in recent work that the RBA has a reputation for clear and transparent policy communication and there is no reason to expect a violent change in policy formation.

The above is an extract from:

http://theconversation.com/australian-dollar-hits-lowest-point-since-gfc-experts-react-36949

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