MNI INSIGHT: RBA Sees Weak AUD Supporting Growth

--Australian Dollar Weakness Seen Bolstering Inflation Outlook

--AUD Seen Staying At Current Levels

By Lachlan Colquhoun

     SYDNEY(MNI) - The Reserve Bank of Australia is taking a sanguine view of

recent weakness in the local dollar, seeing it as likely to bolster its outlook

for strong growth and higher inflation in 2019 ahead of a possible rate

increase, MNI understands.

     While investors have sold the AUD, which softened 10% over 2018, on fears

of a weakening domestic economy and a deteriorating outlook for China, the RBA

looks instead at the impact on trade and export competitiveness.

     In this respect a weaker currency plays into the RBA's 2019 outlook for an

economy growing at around 3%, with ongoing wages growth and consumer spending

tipping inflation over the current annualised 1.9% and into a range of between

2% and 3%.

     Once this point is reached, the RBA has said it might consider raising

official interest rates above the current record low 1.5%, where they have

stayed since November 2016.

     While the Australian dollar was caught up in a flash crash shortly after

the New Year which dragged it to a 10-year low of US67.15 cents, it has since

rebounded to around US72 cents, around the level where it spent most of the

latter part of 2018. The RBA expects it to stay there for much of 2019,

particularly if the U.S. Federal Reserve maintains a more neutral stance.

     The RBA considers that a weaker dollar enhances the competitiveness of

exporters, including those who offer services priced in Australian dollars such

as the tourism and education industries.

     The outlook for agricultural exports is also positive, helped by a fresh

round of tariff cuts under the China-Australia Free Trade Agreement and

ironically assisted by the U.S.-China trade standoff.

     Helped by firmer iron ore and coal prices, which have bucked the trend

among other commodities, commodity export prices in AUD are at a six-year high.

     --OUTLOOK FOR GROWTH

     Australian institutions, in particular the Big Four banks of ANZ, NAB, CBA

and Westpac, have also been adept in using hedging to minimise their exchange

rate exposures associated with raising funds offshore.

     The RBA sees the willingness of offshore investors to lend to Australian

borrowers as a vote of confidence in the economy's financial strength, and it

also views the Kangaroo Bond market - where foreign institutions raise funds in

AUD - as another factor in currency stability.

     Amid the growing noise which surrounds the global and domestic economy the

RBA is mindful of the possible downside and of the risk of volatility but is

maintaining its frequently-stated view, which is one of overall growth.

     This is in the face of signs of panic in the housing market, emphasised

once again by a 9.1% month on month fall in dwelling approvals in November. Even

more dramatic is the fall in the apartment market, with approvals down 54% year

on year.

     While the outlook for the housing sector is bleak, and is not being helped

by the reluctance of lenders to extend credit, other key data is more positive

and plays more into the RBA outlook.

     With the unemployment rate at a low 5.1%, demand for labour is strong, with

job vacancies up 13.9% in November year-on-year to an all-time high, data

released in January by the Australian Bureau of Statistics showed.

     The RBA still sees the strong labour market flowing through to wages

growth, higher consumer spending and ultimately driving inflation higher into

its target band.

     So while market analysts are forecasting a weaker economy could turn RBA

policy around, and towards another interest rate cut rather than a rise, the

bank is sticking to its course, for now.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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