The Australian dollar is holding near two-year highs despite the RBA cooling speculation of an impending rate hike, but a jump above the US80¢ hurdle is looking more elusive.
The currency rallied 5 per cent over the past two weeks, with gains accelerating after optimistic-sounding Reserve Bank minutes, which surprised markets last Tuesday by a discussion of the appropriate ‘neutral’ cash rate.
It shot up to a two-year high of US79.89¢, before deputy governor Guy Debelle on Friday spoiled the party by hosing down expectations of a nearing rate rise, saying the central bank did not intend to signal anything by discussing the neutral rate.
“Debelle burst the Aussie dollar bulls’ balloon leaning heavy against the markets inference of the neutral nominal rate comment in an attempt to jawbone the currency lower,” OANDA trader Stephen Innes said.
Market pricing of rate hikes, which by Thursday had jumped to a 28 per cent chance of a move in November and 100 per cent by May, crumbled to a 16 per cent chance of a November hike on Monday morning and 72 per cent in May.
Aussie fights back
The currency fell more than half a cent to US78.75¢ immediately after the Debelle speech but, not least thanks to a weakening greenback, fought back to trade at US79.21¢ on Monday morning. The Aussie trade-weighted index, against a basket of currencies from major trading partners, was also close to the two-and-a-half year high it hit last week.
Questions around the strength of the US economy combined with growing uncertainty over the Trump administration’s ability to push through its pro-growth agenda including tax cuts, have pulled the US dollar to its lowest in more than a year against a basket of major currencies.
Still, the rebound in the Aussie has left observers wondering how long traders will heed Dr Debelle’s jawbone, particularly if sentiment for the US dollar continues to weaken.
“There doesn’t look to be much to stand in the way of this, in which case AUD/USD is unlikely to extend beyond Friday’s lows at least ahead of RBA Governor Phil Lowe’s lunchtime speech in Sydney on Wednesday,” said NAB currency strategist Ray Attrill.
Dr Lowe will speak on ‘The Labour Market and Monetary Policy’ and both his speech as well as an ensuing Q&A session give him the opportunity to further suppress rate hike talk.
His speech follows key domestic inflation data, which could also weigh on the Aussie, should second-quarter core inflation come in below expectations of a 0.5 per cent quarterly rise and a 1.8 per cent annual gain, which is below the RBA’s 2-3 per cent target range.
AxiTrader market strategist Greg McKenna expects the CPI data and Dr Lowe’s speech to reinforce that the Aussie is a little too high given the RBA’s outlook for inflation and the economy.
“But in many ways, it is the FOMC (the Fed’s interest rates setting committee, which is meeting on Tuesday and Wednesday) which has the power to determine whether or not the Aussie dollar is ready to breach and hold above US80¢ cents or whether it is time to turn tail and head lower once again,” Mr McKenna said.
“I say that because the US Fed has suggested the weak spot in the US economy was “transitory,” he said. “The data suggests that’s not the case. No change in rates is expected, and there is no press conference or dot plots. So the statement is key.”
Outside of the short-term noise, Capital Economics economist Paul Dales said there were two main reasons why he doubted the Aussie will maintain its lofty levels for much longer.
For one, the RBA was in no rush to hike rates given lingering uncertainties around the economy’s strength.
“In our view, the economy has improved, but it’s too soon to conclude that the battle against slow growth and low inflation has been won,” he said, predicting the RBA won’t raise rates before 2019, which is much later than markets and many economists are tipping.
Secondly, Mr Dales isn’t convinced the recent spike in iron ore prices, which have shot up 25 per cent over the past month to $US67 a tonne, will last.
“Although economic growth in China has held up better than we thought, the clear slowdown in credit growth suggests it is only a matter of time before overall economic growth starts to slow,” he said.
A drop back in the price of Australia’s most biggest export earner to around $US50 per tonne by the end of the year should weaken the Australian dollar, he said.
“The combination of those two developments may be enough to drag the dollar back down to $US70¢.”