Aussie dollar hurt by global slowdown gets no help from RBA rate hikes

SINGAPORE – The Australian dollar is tumbling towards a multi-year low, and the central bank appears powerless to stop its decline.

The currency has lost about 3 per cent since May as China’s slowing growth and a stronger greenback exert pressure. A slew of interest rate hikes by the Reserve Bank of Australia (RBA) has provided little support and the Commonwealth Bank sees the Aussie dollar dropping to 62 US cents by early next year, a level it last reached in April 2020.

A resource-linked currency that is sensitive to swings in global sentiment, the Australian dollar has suffered as the world economy lost momentum. It may take a further hit if a report this week shows that Australian employment weakened further last month after a surprise contraction in July.

“RBA policy influence on the Australian dollar remains quite limited,” said Mr Ray Attrill, head of foreign exchange strategy at National Australia Bank in Sydney. “The Australian dollar has never fared well when a global slowdown or recession is upon us, while the dollar still looks rock solid.”

The Australia-US dollar currency pair has been firmly entrenched in a bear trend since mid-August and looks set to test support at its July low of 0.6682. A breach of that level paves the way for it to fall to 0.6464, the 61.8 per cent Fibonacci retracement of its March 2020 to February 2021 rally.

The Aussie dollar has retreated even after the central bank delivered 225 basis points of rate hikes since May. During the last increase on Sept 6, which took the benchmark rate to a seven-year high, the currency fell almost 1 per cent against the greenback.

RBA governor Philip Lowe last week signalled a potential end to aggressive tightening, saying that “all else equal, the case for a slower pace of increase in interest rates becomes stronger as the level of the cash rate rises”.

The next cue for the Aussie dollar may come from jobs data due on Thursday. If the report shows employers added fewer positions in August than the 30,000 forecasted in a Bloomberg survey, the currency may be vulnerable to more losses.

The outlook for Australia’s currency is also clouded by a surging US dollar. Federal Reserve chair Jerome Powell last week reiterated the United States central bank’s commitment to continue raising rates to tame inflation, which is likely to boost the greenback further.

It also does not help that the prospects for China’s growth appear rather bleak, fuelling concerns of weaker demand for Australia’s commodity exports. Goldman Sachs Group and Nomura Holdings downgraded their forecasts for the world’s second-largest economy further last month as Covid-19 curbs and a property sector slump take a toll. BLOOMBERG