A higher Australian dollar isn't hurting the economy for now

WILLIAM WEST / AFP / Getty Images.

The Reserve Bank of Australia (RBA) has stated a higher Australian dollar could “complicate” the country’s economic transition for many months.

While some may disagree, believing the RBA should take a more aggressive approach to talking down the currency, it appears the bank remains comfortable with the level of the Aussie at present.

“Low interest rates have been supporting domestic demand and the lower exchange rate since 2013 is helping the traded sector,” the RBA’s July monetary policy statement said. “These factors are all assisting the economy to make the necessary economic adjustments.”

This “assistance” is no better demonstrated than in the chart below, supplied by UBS Australia’s economics team.

It shows the relationship between the level of the AUD/USD and Australian business confidence, as communicated in the monthly National Australia Bank business survey.

Excluding the period leading up to and including the global financial crisis (GFC), there’s a clear inverse relationship between the two. When the Australian dollar rises, business operating conditions tend to deteriorate. Conversely, as the Australian dollar falls, conditions tend to improve.

That certainly has been the case in recent months. In June business conditions printed near the highest level seen since the GFC, continuing the above-trend levels seen over the past year.

As it has in the past, the Australian dollar acted as a shock absorber for trade-exposed sectors.

Sales are humming and profitability is improving, mirroring the recent improvement in labour market conditions.

While many expect that the RBA will still cut interest rates in the months ahead, perhaps as soon as August, that decision, presuming it arrives, looks set to be dictated by one factor and one factor only — anchoring long-term inflation expectations.

As UBS points out, “current business conditions suggest the (real) economy has little need for additional easing beyond that”.

It also suggests that the AUD — at its current level — isn’t complicating Australia’s economic transition.

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