Dollar lifts ahead of US payrolls

The local unit has ticked higher in late trade, as investors continue to digest S&P’s warning.

The Australian dollar has edged up in late trade on Friday ahead of US payrolls data.

At 5.30pm (AEST), the Australian dollar was trading at US74.98 cents, compared with US0.74.79c late on Thursday.

Most market watchers were still digesting Thursday’s news that ratings firm Standard & Poor’s had lowered its outlook on Australia’s AAA sovereign rating from stable to negative, which followed Saturday’s cliffhanger election.

With votes still being counted for both houses of parliament, economists have warned that the only certainty for the next three years is more policy uncertainty, and the real prospect of ongoing delays in the government’s projected return to budget surplus in 2021.

Many long-time observers of Australia’s economy are warning the next three years could be a damaging setback for the economy, with long-term consequences.

Shane Oliver, chief economist at AMP Capital says he finding it difficult to see any light at the end of the economic reform tunnel.

“A coalition government will have little chance of passing key aspects of this year’s Federal budget,” he said. “Serious economic reform looks off the agenda.”

Warnings around the budget deficit had been coming thick and fast over the last from a wide variety of sources including the central bank, major banks, and other major ratings agencies.

In an interview in May, RBA board member John Edwards said the government’s plans to restore the budget to surplus were implausible, and warned that the ratings companies were moving closer to action.

“There is always a risk we are going to be kicked out of the (AAA) club,” he said.

Loss of the AAA rating now seems highly likely given the eagerness that S&P has shown so far and the reality that genuine reform is unlikely.

Deustche Bank chief economist, Adam Boyton said that while the ratings action won’t send the Australian dollar into a tail spin or send government bond yields soaring, Australia’s ability to fight off future shocks has been diminished.

A shock from overseas will now have a larger impact than was the case during the global financial crisis, he added.

The global financial crisis was fought off thanks to big interest rate cuts, a huge fiscal expansion, stimulus in China and massive fall in the Australian dollar. That combination is unlikely to be repeated.

Mr Boyton said repelling another shock might this time involve a sharply lower Australian dollar, which implies significantly lower living standards for Australians.

- Dow Jones newswires