Australian dollar under pressure from Brexit and China debt

The Ausssie dollar has come under pressure despite news the economy continued to create jobs at a solid pace in May.

The RBA’s Chris Kent has warned of China’s corporate debt. Picture: Hollie Adams

The Australian dollar came under pressure yesterday despite news that the economy continued to create jobs at a solid pace in May.

Unemployment remained steady at 5.7 per cent, a near three-year low, thanks to 18,000 new jobs over the month, the government statistician said.

Still, economists said the new positions were entirely part-time, suggesting businesses might be growing a little hesitant with a federal election looming next month.

Paul Brennan, chief economist at Citigroup, said the trend towards part-time hiring had been gaining momentum this year, with full-time jobs showing zero growth since August last year. Stability in the unemployment rate may not be enough to deter the Reserve Bank of Australia from cutting interest rates in coming months, he added. Financial markets have a 60 per cent probability of a rate cut in August.

At the close, the dollar was trading at US73.48c, down from US73.8c on Wednesday.

The currency also took a big hit after Bank of Japan governor Haru­hiko Kuroda stoked global market fears before the referendum next week on Britain’s place in the European Union.

Mr Kuroda said the BoJ stood ready to work with other central banks to smooth market volatility if Britain voted to leave the EU.

NAB currency strategist Rod­rigo Catril said the remarks drove support for the haven of the yen, and weakened currencies such as e the Australian dollar that tended to do poorly at times of rising international stress.

Opinion polls have pointed to growing support for Britain to depart the EU, a move that might dampen global growth further, produce wild currency swings and fuel demands for major central banks to respond with stimulus.

US Federal Reserve chairwoman Janet Yellen yesterday cited unease before the Brexit vote as a factor in the central bank’s decision to not raise interest rates.

Speaking after the Fed’s two-day policy meeting, Ms Yellen said the Brexit vote “clearly could have consequences” for economic and global financial markets.

“If it does so, it could have ­consequences in turn for the US economic outlook that would be a factor in deciding on the appro­priate path of policy,” Ms Yellen said.

The Fed’s policy-setting committee voted unanimously to keep its benchmark federal-funds rate at a range between 0.25 per cent and 0.5 per cent. It also scaled back expectations for interest rate increases over the next year.

Fears of a successful Brexit vote are affecting the British and European banking sectors with an index of major financials across the region falling to its lowest price since the international market turmoil in January and February.

Exit from the bloc would trigger speculation about other member countries following the same path. Economists said it would immediately translate into weaker commodity prices, hitting the Australian dollar hard.

“While the impact may be temporary, losses in commodities could be steep,” said Daniel Hynes, commodity strategist at ANZ.

Earlier, RBA assistant governor Chris Kent also took some wind out of the Australian dollar when he highlighted growing concerns around a corporate debt bubble in China.

“There is a risk that defaults on these debts could impose significant losses on financial institutions and could lead to a general loss of confidence and a tendency for liquidity to recede in a range of funding markets,” Mr Kent told a business audience in Brisbane.

Mr Kent added that a lower dollar would probably have to do some of the heavy lifting to support the economy in the event of a China-driven crisis.