History is not a useful guide in predicting movements in the Australian dollar at the moment, a central bank official says.
For the best part of two years, the local currency has stayed above parity with the US dollar, mostly helped by the commodity prices hitting 150-year highs and Australia’s massive mining investment boom.
However, while the prices for mining and resource exports started to fall in the second half of 2013, the Australian dollar didn’t drop as much as the Reserve Bank of Australia had hoped.
In fact, RBA governor Glenn Stevens embarked on a campaign to talk down the “uncomfortably high” Australian dollar.
RBA assistant governor of economics Dr Christopher Kent on Friday said the Aussie dollar had stayed above one US dollar because of a variety of unique factors.
The most notable was that Australia survived the global financial crisis relatively unscathed.
US, Europe and Japan suffered badly and their central banks were forced to enact policies to drive new money into their financial systems. That drove down the value of their respective currencies and inflated the value of the Australian dollar.
“The expansions of their balance sheets have, for some time, worked to reduce yields on financial assets in these economies,” Kent said.
“The fact that they are still playing out may have continued to provide some support to the Australian dollar beyond the time at which the terms of trade and the interest rate differential had begun to decline.”
Kent said the exact nature of the mining and resources boom also was a factor in keeping the Australian dollar at unusually high levels when the economy and the labour market was weakening.
“One point of difference is the share of foreign ownership of the resources sector,” he said.
“While it is difficult to get reliable estimates of this share, it appears to have increased over time.
“This means that less of the extra revenue associated with both existing and new resource ventures will accrue as profits paid to Australian residents than might have been the case in earlier booms.”
Kent said the fact that liquefied natural gas (LNG) was the big player of this mining investment boom rather than coal and iron ore meant that larger exports revenues would have less of an impact on employment growth.
He said LNG exports, currently, are less than half the value of coal exports, but would outpace coal exports in only a few years time.
“While LNG projects require a substantial number of Australian workers to help put the new extraction, processing and transport facilities in place, they require relatively few workers during the production phase,” Kent said.
“This means that less revenue from the sale of resource exports will accrue to Australian residents in the form of wages than would have been the case if more of the investment had been focused on other commodities.”
On the markets, the Australian dollar has risen after weak US economic figures raised hopes the US Federal Reserve might not increase the tapering of its economic stimulus program any time soon.
Early Friday, the local unit was trading at 89.87 US cents, up from 89.34 cents on Thursday.
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