The 10-20% appreciation in the Aussie has had a powerful impact on attenuating our already extreme domestic price pressures by cutting the costs of imported goods and also placing downward pressure on import-competing industries. Following the downgrade of the US government's debt securities from AAA to AA+ (similar to our major banks!), UBS expect a rise in risk-aversion and a substantial fall in the Aussie...This could be more bad news for the RBA, although it will offer relief to currency sensitive sectors of the economy and help spur growth.
"Both AUDUSD and USDCAD are likely to retrace further back to parity next week following the downgrade of America. Both commodity currencies were already under pressure this week before S&P moved and even with a better than expected payrolls print in the US on Friday, neither the Australian or Canadian dollar has traded firmly into the end of the week.
The Reserve Bank of Australia, as expected kept, policy on hold at its latest meeting while signalling the next move was likely to be up in interest rates given higher inflation in Australia. But in its latest Statement on Monetary Policy the RBA repeated it would be prudent to hold rates for now given worsening global growth. UBS Economics says the risks are increasing that the central bank stays on hold for the rest of the year now. In contrast, interest rate markets have swung to price in emergency rate cuts by the RBA. Even if these seem unlikely to occur, the Australian dollar is set to fall further as global growth expectations diminish."
