A$ strong. More Pressure on Interest Rates

The A$ has risen significantly overnight against the US$ reaching US78.39cents – a high for 2005 for the A$. The rise has come about as a result of continuing strong employment numbers and an improvement in Australia’s trade deficit.

Unemployment in Australia remains at near 30 year lows of 5.1% and has the possibility to improve even further. The deficit, criticised by all commentators in December has dropped back to $56.4billion from $59billion.

These figures, couple with a slight deterioration in the global position of the $US has led to a strengthening of the $A.

But what does this mean for Australian interest rates? As reported over the last week – there is a growing likelihood that the Reserve Bank of Australia will soon increase interest rates – possibly by an initial 0.25% and a similar amount the following month. Home lending figures that show another 1.2% increase last December, coupled with the improving trade deficit, good employment and an emerging new round of pay rises from the union movement – all appear to make an interest rate rise inevitable.

The problem this will then create is the differential between the Australian and US short term interest rates. The attractiveness of Australian rates will pull in more foreign capital, which will in turn keep the A$ high v the US$ which in turn makes it harder for Australian exporters, yet makes imports cheaper which in turn will worsen the trade deficit – and we are away again on the vicious circle of how to manage a strong vibrant economy.

We live in interesting times.

For information on this article, or on any other aspect of the Australian economy or business opportunities available, please email me.

David
editor@agarcarlyon.com