Ag's export-friendly dollar may fall further - and fuel inflation

Soaring fuel prices and other imported farm input cost rises, plus the growing prospect of another interest rate rise - or maybe two rises - are counterbalancing the trade advantages associated with our sinking exchange rate.

The dollar has been on a generally downward trend since its US80c high in February 2021, although it did have a previous brief stint down at US62c a year ago.

Currency traders are now tipping it could easily dip closer to US60c, or lower, particularly since uncertainty in the Middle East erupted last weekend.

AMP chief economist, Shane Oliver, noted how the tepid Chinese economy, global inflation and general economic fragility continued to undermine Australia's trade prospects and our dollar, potentially sinking it into US55c to US58c territory.

At the same time a more resilient than expected US economy, buoyed by Washington's investment incentives for technology and green energy projects, has kept the US dollar riding much more strongly than predicted throughout 2023.

This, in turn, has weighed on the Australia-US exchange rate.

If the Aussie currency slipped below US62c Dr Oliver predicted it was at risk of crashing much lower.

Bendigo and Adelaide Bank's chief economist, David Robertson, said while our dollar had been quite influential for export sales this year, he suspected "the farm sector would like to see a bit of stability", particularly given the pressure building on import costs.

"A low Australian dollar is generally considered good for exports, but it can cause a fair bit of pain, too," he said.

The Reserve Bank of Australia also faced an extra challenge for its interest rate policy balancing act, given the low dollar was fuelling the inflationary cost of imported consumer and industrial goods, including petrol.

Given the continuing strength of US central bank interest rates at around 5.3 per cent, compared to Australia's official cash rate at just 4.1pc, Mr Robertson was betting on another RBA rate rise later this year.

National Australia Bank also tipped possibly two more rate rises to help support the dollar, particularly if quarterly spending figures released later this month suggested core inflation was not slowing enough.

Farm sector lending specialist, Rabobank, cited rising fuel prices and higher August inflation figures as reasons for it to forecast official RBA cash rates would rise to 4.35pc by November.

Commonwealth Bank of Australia was less confident of another rate hike, but considered any rise would more likely be later this year than early 2024, then a rate cut by May.

NAB's head of foreign exchange strategy, Ray Attrill, said the combination of another local rate rise and the prospect of a softer US economy and lower US inflation by year's end had the bank currently anticipating the Australian dollar rebounding to about US66c by early 2024.

NAB was also factoring in recent signs of creeping improvements in Chinese consumer spending, which would be helpful for exports to our biggest offshore market, and subsequently help underpin the Aussie dollar.

However, in the near term the bank's foreign exchange tipsters would not be surprised if the dollar weakened to US62c.

Mr Robertson at Bendigo and Adelaide Bank, which owns the Rural Bank network, was also anticipating a floor around US62c, recovering to range between US62.7c and US65c.

"Obviously a lot depends on circumstances such as how things in the Middle East play out," said NAB's Mr Attrill.

"There are a lot of moving parts at the moment."

He said traditionally Australia, as the world's biggest gas exporter, saw its currency rise when energy supply uncertainty and oil prices were up, but now the US dollar was enjoying even stronger support as American oil and gas earnings were bolstered by recent global crude oil price hikes.

Meanwhile, although overseas currency investors were shunning our dollar for the more valuable US greenback, others had been taking advantage of the low dollar to buy, or explore buying, Australian assets at a discount.

Canadian energy, infrastructure and real estate giant Brookfield's $18.7 billion bid to buy Origin Energy was a case in point.

Real estate group Ray White's commercial research head, Vanessa Rader, noted while offshore investors reduced their activity in the local market in 2022-23, favourable currency conditions and the improved affordability of many property asset types would likely see more demand from overseas groups in 2023-24.