The Aussie dollar — already the power currency of the season — rose further to a 14-month high on Thursday after unusually clear indications from the governor of the Reserve Bank of Australia, Glenn Stevens, that further rate rises may be on the way.
In remarks that suggest he is anything but “timid” on the issue of a strong currency, Stevens told a function in Perth on Thursday:
“If we were prepared to cut rates rapidly, to a very low level, in response to a threat but then were too timid to lessen that stimulus in a timely way when the threat had passed, we would have a bias in our monetary policy framework… Experience here and elsewhere counsels against that approach.“
As Bloomberg reports, the Aussie gained against 14 of its 16 major counterparts as Stevens’ comment fuelled speculation that the RBA will add to last week’s unexpected rate increase, amid accelerating economic growth.
As a result, Australia’s currency rose as high as 92.23 US cents, the strongest since August 2008, before trading 0.8 per cent higher at 92.18 cents on Thursday afternoon in Sydney, from 91.50 cents in New York on Wednesday. Against the yen, it climbed 0.7 per cent to Y82.40, nearing its October 2008 high.
Analysts are now tipping a rise of 50bp at the RBA’s November meeting, after it surprised investors last week by raising the key rate by 25bp to 3.25 per cent.
Richard Grace at CBA sees the Aussie settling at 0.9300 by year end, and peak at 0.9800 in June 2010 — with some upside risks. The three major drivers behind his bullish forecast are:
- Australia’s relative economic health, which was revised up by the RBA at its October 6 board meeting, to reflect a return to “trend GDP growth” (which CBA estimates to be a little above 3 per cent) by end 2010.
- Further improvements in the global economy, with various factors – including rising global equity markets and solid support for higher commodity prices – supporting a firmer global economic outlook.
- Further depreciation in the US dollar. The Fed’s commitment to keep interest rates “at current low levels for an extended period” suggest short-end nominal US yields will remain unattractively low, says Grace. He also warns of the likelihood of reserve-currency diversification as low interest rates and US deflation continues to erode the appeal of US assets and net portfolio flows “remain insufficiently large to fund the US current account deficit”.
Indeed, as BusinessSpectator’s Robert Gottliebsen notes on Thursday:Forecasting currencies is full of pitfalls, but at this point an amazing set of forces is driving our dollar higher and shows no signs of abating…Not only is Australia linked to the growth of Asia but we are lifting interest rates, with every indication that there are more interest rate rises to come. And, of course, once the traders start pushing up your currency it becomes like a giant snow ball. The currency always advances much further than you expect and in the end there is grief.But this time around there is an extra force driving the Aussie — the fall in the US dollar. Gottliebsen adds:A lot of Australian companies will suffer, including the tourism industry, manufacturers and companies with big US dollar incomes that are not offset by rising prices like the big miners. But if you are an importer it’s wonderful.Perhaps so, but some economists warn that the RBA is making a mistake by raising rates too early.
As Frank Gelber, economist at BIS Shrapnel, remarks in The Australian on Thursday:
Maybe the RBA is trying to dampen the aggressiveness of housing owner-occupiers and investors so that there is less damage as interest rates do rise. [But] there is no hurry to raise interest rates. With overseas rates likely to remain low, the resultant strong dollar will dampen already weak growth and perhaps cause structural damage to the remains of our tradables industries. I would have waited until well into next year.
Related links:
Australia raises rates - Lex
What Australia’s rate rise means for the markets - FT Alphaville
Australia confounds the pundits - FT Alphaville