Australian Dollar Ticks Up As Inflation Rises, Virus likely Blunts Impact

It’s possible the Australian Dollar will tick up higher as inflation rises in response to the discovery of a new virus that impacts the power of the Reserve Bank.

Although many investors believe the RBA can defend against an additional rise in inflation, it will be up to the Reserve Bank to counteract any attempts to push it up.

In its first meeting with economists the Federal Government discussed the future impact of the viruses and growth industries. They’re likely to discuss growth industries like agriculture. The recent growth of dairy farms has been driven by more expensive funding for agricultural research, so it will be interesting to see how this impacts on the Reserve Bank as they attempt to maintain economic growth at reasonable levels.

According to an anonymous government source “The epidemic was quickly contained and eradicated from financial institutions but not from consumers.” There were no reports of physical damage or loss.

Of course this is an uncertain news report but this suggests the potential for higher growth could continue beyond expected and that could influence the price of agricultural products. One thing the Government does understand is our over-reliance on agriculture. An increase in the price of food commodities could put strains on household budgets.

However with large risks to the economy in place and limited recovery there are no immediate indications of a strengthening economy. The economic situation for the coming months will depend on whether the RBA increases interest rates.

If interest rates remain low it will place downward pressure on the currency. With low interest rates there are fewer inflationary pressures but many investors will want to buy when they are low.

The Australian dollar could become more expensive if the RBA increases interest rates and the corresponding move into a higher currency will lessen investor buying pressure. Although many are concerned about an increase in the exchange rate, there are a variety of reasons why the exchange rate may rise.

From the banks’ point of view low export prices and higher import costs can give them more profit margin. Both sectors could see an improvement in the exchange rate. With the banking sector has a poor reputation it may take a while for them to recover after the GFC.

This has resulted in some research agencies including Morgan Stanley cutting their forecasts. Their negative outlook may reflect the impact on corporate lending from the GFC.

We could also expect there to be higher interest rates in less efficient sectors. Growth industries that require lower interest rates may have problems repaying their debts on time.

It would be a surprise if the Reserve Bank did not start to raise interest rates in response to economic weakness. This will lead to further depreciation in the currency.

As the Federal Government feels it needs to boost growth and address the problem of unemployment, it will probably encourage the RBA to lift interest rates. It’s clear that agricultural investment in Australian dollar areas will continue to be profitable.