The recent rise of the Australian and New Zealand dollars will prevent GDP growth from strengthening this year and will keep core inflation at uncomfortably low levels. This is particularly true in Australia, where the dollar has reached a 10-month high of US$0.78. Admittedly, that’s not far above its fair-value of around US$0.75. But the dollar really needs to be undervalued. Indeed, if it just remains at current levels then net exports will shift from adding to GDP growth to subtracting from it. This is especially worrying at a time when investment has remained muted and households have become more cautious.
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