RBA to watch Aussie dollar closely for economic balance

Rising iron ore prices and a weakening US dollar in 2021 could push the Reserve Bank to put further downward pressure on the local currency, economic experts say.

Economic growth could be held back if the Aussie dollar rises too quickly.

Booming iron ore prices and forecasts of a weaker US dollar as the global economy recovers in 2021 could present the Reserve Bank with fresh challenges on the local currency front, according to economic experts.

The Australian dollar has risen in value against the greenback for much of 2020 due to strong commodity prices, trading around the US75.9c mark on Tuesday.

China’s ongoing rebound from the coronavirus pandemic has boosted the price of iron ore, to around $US155 a tonne on Tuesday, benefiting Australian exporters.

Further expectations of growing demand for metals, linked to a broader 5.1 per cent global economy recovery, is set to keep that positive momentum going.

But it will give the RBA some pause for thought, according to Commonwealth Bank’s chief economist Stephen Halmarick.

Commonwealth Bank chief economist Stephen Halmarick. Picture: Hollie Adams/The Australian

“It would hold back economic recovery if the Aussie dollar rises too fast,” Mr Halmarick said.

“While iron ore exporters are now enjoying prices far in excess of what they had expected, it is being partially offset by the strong Aussie dollar.

“Iron ore remains our strongest export amid growing trade and diplomatic tensions with China, which have already impacted lobster, barley, beef, coal and wine sales, just to name a few.

“We think the RBA will move to introduce further quantitative easing if the dollar rises too quickly.

“As we see it though, the Aussie dollar is still within our ‘fair value’ range of US71c-US82c.”

While it sits within that range, measures to manage the Aussie dollar would benefit most parts of the economy.

International travel, usually one of the biggest beneficiaries of the higher dollar, would see limited impact, subject to the availability of vaccines, Mr Halmarick said.

Consumer and housing demand, along with fiscal and monetary policy support being provided means Australia has a “more positive” outlook, he said.

“Having entered the world of unconventional monetary policy, it is going to be a long time before the RBA can retreat from providing significant support to the economy.”

As it stands, RBA’s cash rate target is expected to remain at 0.1 per cent for at least three years, it is funding the banking system for three years at 0.1 per cent and is targeting the three-year Commonwealth bond yield at 0.1 per cent while engaging in a quantitative easing (QE) program to buy $100bn of commonwealth and state government bonds over the six months to April 2021.

Commonwealth Bank is predicting the Aussie dollar will get to US78c by the end of 2021.

Westpac has consistently forecast that the Aussie dollar is in a long term upswing.

“We identified March this year as the low point and have anticipated at least two years of a rising AUD, particularly responding to the economic outperformance of the East Asian region,” Westpac chief economist Bill Evans said.

“The AUD recently reached an important milestone of US75c and we expect it is now on track to reach US80c by end 2021 and US82c by mid-2022.”

He predicted the RBA would move to extend its quantitative easing program in early May.

“The current $100bn program is set to expire by early May and we expect it will extend the program by a further $100bn ending in early November. That program will be replaced by a smaller $50bn to May 2022 and a final $50bn to November 2022.”