_The Australian dollar rebound and what it means for property
The dollar dropped rapidly in early March as the global outlook deteriorated, falling as low as 56 US cents on 19 March. This was not out of line with past episodes of escalating concern for the health of the global economy. The Australian dollar has historically been viewed as a proxy for the strength of global growth, and more particularly for the strength of the Chinese economy and hence the strength of demand for our major commodity exports such as iron ore and LNG.
However, it has since mounted a strong comeback, triggered by the RBA’s announcement on 19 March of a multi-faceted and large-scale package to support the economy and safeguard financial stability. This included a cut in the cash rate to 0.25%, targeting a 0.25% rate for the three-year government bond yield, and a $90 billion funding facility for banks aimed at supporting lending for small and medium-sized businesses.
While in normal circumstances, a cut in interest rates would tend to put downward pressure on the exchange rate, the current risks to the outlook and the fact that other central banks were also easing policy rates meant that the RBA’s strong demonstration of support for the economy was supportive for the dollar.
Smaller fall and faster rebound than GFC
Despite the different nature of the events, it is interesting to compare the recent volatility with the last time we saw a global downturn during the financial crisis. On this occasion, the Australian dollar fell much further, coming off a much higher level of US98 cents in July 2008 and dropping to US61 cents from July to October 2008. It also remained at this depressed level for much longer, hovering at low levels for around 6 months before recovering from March 2009.
What does the rapid rebound mean for property?
While the crisis is ongoing, and currency movements are frequently volatile reflecting a wide range of forces, we can still use the recent experience to form some judgements on current perceptions of the Australian economy and hence the implications for the property sector.
1. Australia’s aggressive policy response has had a strong impact on market sentiment
The Government’s successive announcements of large rescue packages, including the JobKeeper, in conjunction with the RBA’s announcements have provided significant reassurance to markets as reflected in the strong recovery of the dollar.
2. Australia is perceived to be relatively resilient
Recent news that the spreading of the virus has largely stalled, with falling numbers of active cases, has highlighted the contrast with other countries having greater difficulty containing the spread, and created a perception that Australia’s economy will be able to recover more quickly than other major economies. In turn, this will foster belief that Australia’s property markets will be able to recover more quickly.
3. Our improved trade performance acts as a support for the dollar
Compared to past experience of currency volatility in global downturns, the dollar dropped less this time around. Besides our success in containing the virus, this can also be partly be attributed to Australia’s improved trade performance and resulting transition from a perpetual current account deficit to a surplus over the past year. Strong export performance implies a high level of global demand for the Australian dollar and makes it less likely that it will fall substantially in periods of market stress, compared to past periods when we have had a high current account deficit. Indeed, there are already signs that commodity exports are bouncing back as China eases lockdown measures and returns to growth.
4. Sustained demand from cross-border investors for Australian assets
The strong rebound of the Australian dollar is a vote of confidence in the relative stability of Australian assets. While property markets are experiencing subdued trading volumes and an uncertain outlook reflecting the economic downturn, we can nonetheless expect cross-border investors to retain their appetite for Australian assets. And when more normal liquidity returns Australia will be a favoured destination due to its stability and outlook for a strong recovery in 2021.
5. Importance of continued virus containment
The volatility of the dollar reflects the sensitivity of market movements to the spreading of the virus and the consequent impact on the economic outlook. While recent news that the spread has stalled has clearly boosted market sentiment and this will support demand across a number of asset classes including property, retaining the confidence of international investors will be dependent on maintaining this success in coming months.
For further information please contact:
Ben Burston
Partner, Chief Economist
+61 2 9036 6756
Ben.Burston@au.knightfrank.com