Aussie Dollar Update
The Aussie dollar has been rising strongly against US dollar of late, nearing more recent highs of close to 80c.
This move has been both a function of a rising Aussie dollar and a more softer / stagnant US dollar. The Aussie dollar's movement against a broader range of currencies has been somewhat different, given still plenty of downward pressure on currencies globally in light of central bank policy and intervention.
The move higher in the Aussie dollar more recently has come from 3 main areas:
Softer outlook for US dollar - recent softening in US economic indicators potentially showing the economy's inability to absorb recent rate rises by the US Fed. In addition, increasing concerns around President Trump and Republican house majorities to get things done (tax reform and infrastructure investment).
Commodity price rises - more recently, commodity prices have either stabilized or ticked up on the back of Chinese stimulus increasing Chinese demand and on broader positive sentiment regarding global growth and global trade.
More hawkish (bullish) comments from the RBA - the RBA has changed the tone of their comments and rhetoric of late with less talk about having to lower rates further and more talk about potential rate rises in future, with no timeframes mentioned. Recent talk of a new neutral RBA Cash Rate of 3.5% was misconstrued by the market.
We think the recent move higher in the Aussie dollar is the currency's last hurrah.
The underlying economy is soft and likely to be for some time. The housing construction boom is coming to an end, the household is heavily indebted, which along with low wages growth and rising household costs, sees household discretionary expenditure coming under a lot of pressure. The RBA is playing a game with trying to improve sentiment and confidence by talking up the economy's prospects. Their "new neutral" target Cash Rate of 3.5%, whilst 2% higher than the current rate, is well below historical neutral levels and will take some time to get to from current rates. Commodity prices are likely to remain range bound with pressure to the downside in light of increasing supply. Whilst we're not overly bullish on US dollar rising strongly, we do think it will edge higher over time in light of the growing strength in the US economy.
So, all in all, we think the Aussie dollar will move lower against the US dollar over the next 6-18 months. Aussie dollar movements against a broader range of currencies will be dependent on central bank policy within each country. The RBA actually needs the Aussie dollar to move lower more broadly so that there's less reliance on a very low Cash Rate to stimulate the economy and so that the service economy (sectors outside of mining and construction) can blossom, especially from an export perspective.