ANZ Research market calls: hard gains from soft Aussie dollar

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The Australian growth outlook will be boosted by a softer Australian dollar amid changing expectations about US economic performance, according to ANZ research.

"While growth since the global financial crisis has been largely driven by the mining sector, the lower currency will help to boost activity and aid the transition towards non-mining industries."
ANZ Research

The US Federal Reserve looks to be on track to gradually increase rates next year. These expectations have helped to drive the US dollar higher and the $A lower, helping the domestic outlook. 

The depreciation in the $A has important implications at home. While growth since the global financial crisis has been largely driven by the mining sector, the lower currency will help to boost broader activity and aid the transition towards non-mining industries. 

Highlighting the current health of the US economic recovery was recent US gross domestic product data which showed growth rose at a strong annualised pace of 3.5 per cent in the third quarter. 

The US labour market also continues to improve, including a steadying in the participation rate. This rise in jobs growth has seen the US unemployment rate fall to 5.9 per cent, its lowest level since mid-2008. 

ANZ Research expects that improvement to have continued in October with official data this week expected to show US employment up 285,000 in the month. This is significantly above the market forecast. 

The unemployment rate should decline to 5.8 per cent, with an unchanged participation rate. 

The Australian labour market looks to be slowly improving but the official numbers are unreliable for now. 

While the Australian Bureau of Statistics releases its October labour force data on Thursday, recent data quality problems suggest we cannot rely on these numbers at present. The ABS is attempting to address the problems with the survey but we don’t expect to get a clear read for some months. 

For this reason, we think other labour market indicators should be given added attention at present.

On this front, the ANZ job advertising series continues to point to an improvement in labour market conditions.

With the US Fed on track to raise rates, the scene is set for the Reserve Bank of Australia to begin hiking rates in May. 

Still, the housing market remains a concern for the RBA, with growth in investor housing credit reaching a post-financial crisis high. 

The RBA is likely to acknowledge the benefits of the lower currency for the growth transitionin its Statement on Monetary Policy (SMP) on Friday. 

With commodity prices sharply lower, ANZ Research expect the RBA to leave its growth forecasts unchanged.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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