The Reserve Bank has broken its silence and conceded a weaker Australian dollar would help the economy recover from its historic COVID-19 recession, echoing some of the market’s blue chips, which have warned of exchange rate pain.
The central bank’s comments, revealed in the minutes of its September policy decision, came a day after banking giant Macquarie Group flagged that its first-half result would drop sharply compared to a year ago in part due to a stronger Australian dollar.
The investment bank generates about two-thirds of its earnings from outside Australia, prompting broker UBS to downgrade Macquarie’s earnings per share forecasts for financial 2021 and 2022 due in some degree to an “unfavourable currency translation impact”.
Currency strength is a factor that companies are largely powerless to control, even as the drivers of the Australian dollar’s rise to more than US73¢ are a consequence of improved fundamentals.
Strong iron ore prices, a weak US dollar, and a central bank that has resisted the pull of negative rates are all playing a part in underpinning the currency’s recovery from a seventeen-year low of US55¢ to a two-year high of US74.14¢ in less than six months.
Strategists are expecting more gains, with some tipping US80¢ for the Australian dollar by the end of next year. It was trading at US73.29¢ later in the session on Tuesday.