During May the Australian dollar was down nearly 10% against the US dollar. In the shorter term, the lower domestic currency is expected to benefit Australian companies, particularly those with a global earnings footprint. Longer term, the weaker Australian dollar may improve the outlook for Australian economic growth.
Key points:
Global markets continued their positive trend in May. The US equity market continued to be supported by stronger than expected corporate earnings, with 42% of the companies that reported their first quarter 2013 results beating consensus by more than 5%. The European markets were broadly positive on slightly improved confidence. Despite China’s official purchasing managers index (PMI) surprising to the upside during May (at 50.8 versus consensus of 50.0), the Hang Seng fell 1.5%. In Japan, the Nikkei retreated by -0.6% as volatility in Japan’s bond market encouraged investors to take profits on an index that has risen more than 45% since the elections held during December 2012.
In Australia, economic data continued to highlight weakness in the economy, with sharp falls in consumer confidence, declining house prices, insipid retail spending (rising a modest 0.2%), waning business investment, falling job advertisements (down 2.4% in May) and downgrades from a raft of mining services companies. Despite the recent weakness, the Reserve Bank of Australia (RBA) left the cash rate unchanged at 2.75% at their June Board meeting citing recent data is consistent with the outlook published by them last month.
While this month’s inaction on rates by the RBA indicates a reluctance to acknowledge the weakness in the economy, the board retained the bias to easing rates, noting the inflation outlook continues to provide scope to cut interest rates further if required. We expect that the likely timing of the next rate cut will be at the August Board meeting, following the release of June quarter inflation data.
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