Reserve Bank Cuts Rate; Australian Dollar Set for Further Weakness
Before its Sept. 14 elections, the Australian government will release its final budget before elections proposals. The budget is expected to show due a deficit of A$14.5 billion for the fiscal year. To account for this shortfall, the government cites the elevated strength of the Australian dollar, as it constricts prices and corporate profits, thus limiting overall tax revenue.
The Australia's economy is driven largely by its resource investment boom, with commodities demand from developing countries such as China playing significant roles as primary export destinations. Increases in currency values make exports more expensive for foreign customers, so it is clearly in Australia's best interest to enact policy measures that help return the aussie to its historical averages.
Downward Valuation Prospects
All of these factors combined suggest continued weakness for the Australian dollar in the near-term view. Interest rates in Australia are still well above what is seen in the other G7 economies, so there is still scope for the RBA to make monetary policy more accommodative in order to limit the negative effects an elevated currency is having on macro growth data.While positive for the stock markets in the region, these factors will put downside pressure on the Australian currency, likely sending it to new lows before the end of 2013. This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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