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Five questions on the Australian economy

By Michael Knox - posted Tuesday, 2 February 2021


The $A

Now, what can the RBA do about the Aussie Dollar? We think that the RBA will attempt to slow the rise of the Australian dollar this year by buying Australian bonds and semi-government bonds, keeping our long-term interest rates low, relative to U.S. bonds. In theory and in practice, it's long-term interest rates, not short-term interest rates, that actually drive where the real exchange rate will be.

What's happening here is not so much the Australian dollar going up; it's the US dollar going down. The RBA can't stop the US dollar from going down. The falling US dollar is caused by an enormous expansion of the US Budget deficit to 15% of GDP, which is the largest Budget deficit since WW2. This is over 10% higher than the deficit was the previous year. That's an enormous increase in the flow of bonds onto the international market. In order to clear the market for these bonds, the real value of the US dollar has to fall and the Aussie dollar go up.

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What the RBA gains for the Australian economy, by intervening in the bond market firstly, may be that it can slow the rise of the Australian dollar, but not prevent it. By buying Australian bonds, this increases the money base in Australia which increases the money supply. Therefore, there's the flow of credit in Australia which increases non-mining investment and that drives employment.

We'll have a stronger domestic economy and faster domestic growth because of what the RBA is doing. Still, the Australian dollar has to rise. It is the US dollar going down that is making the Australian dollar go up.

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Disclaimer

The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual’s relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so. Those acting upon such information without advice do so entirely at their own risk.

This report was prepared as private communication to clients of Morgans and is not intended for public circulation, publication or for use by any third party. The contents of this report may not be reproduced in whole or in part without the prior written consent of Morgans. While this report is based on information from sources which Morgans believes are reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect Morgans judgement at this date and are subject to change. Morgans is under no obligation to provide revised assessments in the event of changed circumstances. This report does not constitute an offer or invitation to purchase any securities and should not be relied upon in connection with any contract or commitment whatsoever.



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About the Author

Michael Knox is Chief Economist and Director of Strategy at Morgans.

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All articles by Michael Knox

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