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Aussie surge continues after federal budget presentation

06:02, 30 March 2022

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A view of the Australian House of Representatives in Canberra
A view of the Australian House of Representatives in Canberra – Photo: Shutterstock

The Australian dollar (AUD), commonly known as the Aussie, rose to its highest level since November 2021 after the Australian federal government’s budget presentation for the 2022-23 financial year. 

On Wednesday, the AUD/USD exchange rate was up 0.29% to 0.7530 after the Australian federal government decided to loosen its purse strings and spend more as it presented a populist budget ahead of the elections next year. 

“The Government has announced almost AUD40bn ($30.11bn) of new spending (or revenue reductions) across the five years from 2021-22. This is quite a bit more than we expected. Importantly, more than half is set to occur in the current financial year and 2022-23,” ANZ Research said in a note. 

Splashing the cash

Spending in areas such as “cost of living” payments, a temporary cut to fuel excise as well as more help for home buyers is expected to drive up inflation and ramp up the pressure on the Reserve Bank of Australia (RBA) to raise interest rates, which will result in a further boost for the Aussie. 

“This [government spending] adds to demand at a time when the economy is already strong. When the RBA starts to hike, we expect it to move with some vigour and the cash rate to reach 2% by the end of 2023,” ANZ Research’s note added. 

Marcel Thieliant, senior Australia, New Zealand and Japan economist at Capital Economics also feels that the fiscal policy will put pressure on the RBA to raise rates aggressively. 

Interest rates will rise soon

“With the government facing defeat in May’s election, today’s Budget continued the course of loose fiscal policy that began at the start of the pandemic. As the unemployment rate is set to fall to a 50-year low, this only adds to the pressure on the RBA to start tightening monetary policy,” he said in a note. 

“With the government doing nothing to restrain demand, the RBA will have to do the heavy lifting to rein in inflation. We’re sticking to our above-consensus forecast that the Bank will lift rates to 1.75% by the end of next year,” he added. 

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Aussie to benefit

According to Shane Oliver, head of investment strategy and chief economist at AMP Captial, post the federal budget there is more strength for the Aussie, with the RBA expected to raise interest rates soon and commodity prices still supporting the currency. 

“We expect the first rate hike in June and the cash rate to reach 0.75% by year end and 1.5% next year. The extra stimulus in the Budget increases the chance that the first rate hike is 0.4% rather than 0.15% (taking the cash rate to 0.5%), with the cash rate reaching 1% by year-end,” Oliver said in a note.

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