Tyndall sees Aussie dollar remaining strong

Tyndall Asset Management has suggested that the Australian dollar is likely to remain strong over the short- to -medium term, generating implications for monetary policy and inflation management over the longer term.

Tyndall head of fixed income Roger Bridges said he believed that as long as global uncertainty and problems in Europe and to an extent, the US, persisted, the behaviour of the Australian dollar (AUD) was unlikely to change significantly.

"I also believe that the domestic economy is on a slower growth path as it continues to adjust to a high Australian dollar, and the RBA is setting monetary policy to accommodate this period of adjustment," he said.

Bridges said that, in the short term, Australia was likely to experience lower official interest rates as the rest of the world continued to de-leverage, and the continuation of foreign quantitative easing (QE) programs kept the Australian dollar strong.

"The currency will most likely continue to remain strong in the near term, which should restrain inflation, allowing the RBA to keep interest rates at these lower levels," he said.

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"However, in the longer term, as the dollar stabilises and the economy continues to adjust to accommodate it, the effect of the dollar on containing inflation will wear off (as it began to in the December quarter of 2012)," Bridges said.

He said that for interest rates to remain low, inflation (and the outlook for it) needed to remain stable.

"This either requires domestic inflation to fall or the AUD to not depreciate," Bridges said.