24-Year High for Aussie Dollar

May 19, 2008

The Australian dollar touched $0.9571 earlier today, stronger than any level since March 1984. Local monetary officials have served notice that the benchmark cash rate of 7.25% will not be reduced anytime soon despite evidence of cooling domestic demand. The policy bias in fact remains to the upside. A hike would be warranted if either the slowdown in domestic demand stalls, reverses or simply proves insufficiently strong. Higher wage pressures against the backdrop of more elevated expected inflation would also lead to tightening. The central bank staff does not foresee inflation settling back into a 2-3% target until 2010 from 4.2% at present, and the Labour Government’s budget proposal agrees, projecting inflation at 3.5% next fiscal year. Australia will get a huge real-side stimulus from its rising export/import price ratio. Fiscal policy is charted on a moderately restrictive course. The budget cuts taxes and spending and projects surpluses equal to 1.8% of GDP in FY07/08 and1.9% in FY08/09. Australia’s commodity price index leaped another 10.2% last month, and gold — against which the Aussie currency is especially sensitive — has climbed back over $900/oz from $852/oz at the start of May. Lower-than-forecast wage growth in 1Q08 of 0.9% against 4Q07 and 4.1% y/y after 4.2% in 4Q07 on such a basis appears inconsistent with other tight labor market data. The Australian dollar, which averaged $0.839 in 2007, $0.751 in 2006, and $0.633 in 2000-05, could test parity especially if the greenback falters in a general sense later this year.



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