Australian dollar: The speed of the $A sell-off has caught ...

“The Aussie has come a lot lower, a lot faster than our forecasts had allowed for and that necessitates a re-think,” said NAB’s head of FX Strategy, Ray Attrill. “I think the US62¢ area is the next logical target or support level.”

The weaker Aussie has created an inflationary headache for the Reserve Bank because it drives up the cost of imported goods.

IFM Investors chief economist Alex Joiner said the currency’s slide was an “unwelcome eventuality” for the RBA, and had complicated the outlook for the economy and interest rates. The central bank has already added 4 percentage points to the cash rate since May last year.

However, Mr Joiner said it was more concerning for discretionary retailers, given businesses would be paying more at the docks at a time when they were already struggling to pass on higher costs to consumers.

Retail sales have weakened as consumers grapple with the rising cost of living. Petrol prices are also hovering at the highest level in more than a year. The average price for regular unleaded fuel in Sydney hit 213.6¢ per litre this week, according to the NRMA.

“Usually, when there’s weak consumer demand and a falling currency, margins get squeezed pretty aggressively and that gets reflected in equity prices,” Mr Joiner said.

Although the weaker $A has made it more expensive for Australians to travel to Europe or the US, it has also made it more appealing for inbound travellers from the northern hemisphere.

“From the point of view of inbound tourism into Australia, the exchange rate will be something of a boon for the tourism sector,” Mr Attrill said.

The interest rate differential between Australia and the US has been an additional drag on the currency. The RBA cash rate sits at 4.1 per cent and the US Fed Funds rate lies in a range of 5.25 per cent to 5.5 per cent.

Traders sharpened their bets this week that the RBA would leave rates on hold again next month after data confirmed that the central bank’s rapid tightening had started to cool Australia’s labour market.

In contrast, minutes from the US Federal Reserve’s policy meeting last month showed officials were still worried about resurgent consumer prices, and this could require further policy tightening.

That lifted the US 10-year bond yield to 4.32 per cent, within touching distance of last year’s high. The 30-year bond yield hit its highest since 2011.

“The interest rate differential can continue to be negative and a headwind for the Aussie dollar in the coming months,” CBA’s Ms Kong said.

However, the Australian dollar’s recent decline has been largely fuelled by a flurry of weaker than expected data from China, which showed the world’s second-largest economy continued to deteriorate last month.

This week, retail sales and industrial production figures came in well below economists’ expectations and last month, new home prices fell for the first time this year. Additionally, bank loans slid to a 14-year low, consumer and producer prices declined, and exports dropped the most since the start of the pandemic in February 2020.

Concerns are also growing about the risk of contagion from China’s troubled property sector, which accounts for about 40 per cent of the country’s demand for iron ore. On Friday, Chinese property giant Evergrande Group sought bankruptcy protection in New York.

The slowdown in China – Australia’s largest trading partner – has also started to weigh on commodity prices, which CBA says are the biggest driver of the Aussie.

Iron ore prices dropped below US$100 a tonne this week before recovering slightly on Friday, and copper prices hit a three-month low. Oil was on track to post its first weekly loss since June.

CBA warned that raw material prices could continue to fall unless Beijing announced larger and more direct stimulus.