AUD/USD’s Decline May Assist in Avoiding Recession

After nearly a quarter century of economic growth, the Reserve Bank of Australia is again counting on the currency’s drop to keep a recession at bay without the need for interest-rate cuts. The Australian dollar is at US70.43¢ in midafternoon trade in New York. According to Bloomberg data, the Aussie slid as low as US69.82¢ in afternoon trading in Europe before rebounding. It was at US70.24¢ at Wednesday’s local close.

The Aussie has slumped 14 per cent since December 31, extending a 21 per cent drop over the previous two years, as the domestic economy grapples with the end of a mining boom and a slowdown in China. The currency fell to a six-year low Wednesday after data showed weaker gross domestic product growth, with options signalling further declines for the exchange rate are in store. “The Aussie dollar will continue to do more of the work for the RBA and it won’t be necessary for them to cut interest rates to continue to support this rebalancing of growth in the economy,” said Paul Bloxham, chief economist for Australia at HSBC Holdings in Sydney. Bloxham, a former RBA economist, reckons the central bank will be on hold over the next year.

RBA governor Glenn Stevens has kept the cash rate at a record-low 2 per cent since May while saying he expects a moderate expansion that will pick up in coming years. The currency also sank during the global financial crisis in 2008, helping Australia skirt the recessions that engulfed developed-market peers, and acted as a cushion when its neighbours were hurt by the late 1990s Asian meltdown. While the median forecast of analysts polled by Bloomberg is for the currency to remain near 70 cents till year end, net bearish bets on the Aussie climbed to the most since March in the week to August 25, according to data from the Commodity Futures Trading Commission. Options market pricing shows about a 60 per cent chance of a decline to 65 cents over 12 months.