The Aussie at US80 cents is a problem for the RBA
The rise of the Australian dollar won’t make the RBA happy.
by Philip Baker
The last thing the Reserve Bank would want right now is a run in the Australian dollar to US80¢, but that’s exactly what might happen in the next few months.
Of course, forecasting currency moves is a mugs game. Alan Greenspan the former chairman of the Federal Reserve told currency traders that years ago but it doesn’t stop everyone from trying.
The Australian dollar at US80¢ would have seemed ludicrous just seven weeks ago when it was changing hands at a fraction under US74¢, and some would say it still does, but a change in rhetoric about higher interest rates from global central banks has changed that line of thinking for others.
On Monday morning the local unit was changing hands at US78.17¢, aided in part by selling in the US dollar by currency speculators.
According to the latest data from the US Commodity Futures Trading Commission, hedge funds have now been net sellers of the greenback for eight straight weeks and have halved their holdings of US dollars to around $US1.3 billion
Not since May 2016 have these types of traders held such a small amount of US dollars.
Indeed, as well as ditching the greenback they are now loading up on the commodity currencies, like the Australian dollar , the New Zealand dollar and of course the Canadian dollar after the Bank of Canada backed up their talk on higher interest rates with a move last week.
All this talk of higher global interest rates and a global economy in good shape has sparked a bid tone for currencies like the Australian dollar.
Interest rates here are still high when compared to the rest of the world.
Helping that whole line of positive thinking when it comes to the global economy was the latest batch of Chinese economic data that came in better than expected on Monday.
China’s GDP grew at 6.9 per cent in the year through the second quarter, the same pace as the previous quarter and slightly better than the 6.8 per cent growth rate predicted by most experts.
At the same time, however, the world’s most influential central bank, the US Federal Reserve, that was first out of the blocks when it came to higher rates, is now taking a more modest line, according to traders.
That’s in part due to some of the weaker economic data, such as Friday’s disappointing inflation and retail sales figures, that has, all of a sudden raised concerns about the strength in the US economy.
It’s worth noting that one reason why so many economists were bearish on the Australian dollar at the start of this year was the “realistic” chance that some time this year interest rates in the United States would be higher than in Australia for the first time in 15 years.
The last time it happened, the Australian dollar slumped to as low as US48¢.
But now the US economy doesn’t feel so strong.
Who knows how long it can all last but while it does it makes the Australian dollar vulnerable to a round of buying against the US dollar.
At 66, the Australian trade weighted index is also at elevated levels.
With so many expecting the Australian dollar to fall, forecasts from most economists see it reaching US72¢ in three months and US70¢ by the end of the year, there’s never been a better time to be a contrarian trader to take on the local dollar and push it higher.
Call it Murphy’s Law.
And as the the summer holidays in the Northern Hemisphere get into full swing, trading volumes will probably drop away which means the local currency, like a lot of other securities, will be easier to push around.
By and large, there are two major reasons why experts think the next major move in the Australian dollar is down
First is commodity prices that are tipped to remain subdued, but the second is all about the difference in interest rates between the US and Australia, which was tipped to narrow as the Fed hikes and the RBA stays on hold.
But will the Fed maintain it’s tightening path if the inflation data continues to be on the low side ?
History says “yes” to that question, most of the time, which will make it hard for the Australian dollar to get to US80¢.
As long as the unemployment keeps falling then the Fed will be more inclined to ¢hike rates even if the inflation readings are benign.
That scenario played out in 1994-95 and 1999-2000 when the Fed tightened monetary policy and inflation was low, although in 2004 the Fed was behind the curve and inflation was already on the rise when they started to hike rates.