• While capital flows associated with safe haven demand and foreign central bank reserve diversification have no doubt played a role in terms of recent $A strength, it is also easily consistent with the long term relationship to the terms of the trade, high relative interest rates in Australia and an improvement in confidence in global share markets over the last two months.
• As such, there is little justification at current levels for the RBA to directly intervene to limit the $A. A better approach would be for the RBA to continue lowering interest rates as this would help struggling cyclical sectors of the Australian economy and take some pressure off the $A.
• The $A is likely to remain strong over the medium term but the best of the gains are probably behind us.

To read this edition of Oliver’s Insights, click here.

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