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AUD Hits Multi-Year High as Greenback Woes Continue
Posted On 28 Jul 2017
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It has been a productive month for the AUD (Australian dollar). The currency has gained 5% in July and is looking to flex its muscles even further as broad market forces continue to undermine the USD (U.S. dollar).
AUD Has Performed Well for 2017
The AUD/USD exchange rate peaked at 0.8057 on 27 July, its highest in more than two years. The recent gains came after the Fed (U.S. Federal Reserve) left interest rates on hold and said balance sheet normalization would begin “relatively soon.”[1]
The AUD has quietly emerged as one of the year’s best-performing currencies. The Aussie has gained 11% year-to-date, reversing a multi-year downtrend. However, a stronger local currency isn’t exactly what the government is after.
AUD Aided by the RBA
The Reserve Bank of Australia (RBA) has regularly paid tribute to the role played by the depreciation of the dollar since January 2013. At the time, one Australian dollar bought $1.05 U.S.[2] The RBA has contributed to the Aussie’s steep drop through a combination of ultra-loose monetary policies, including cutting interest rates to record lows. Low-rate stimulus has been relied upon to shore up the local economy amid declining global demand and deflation.
Consumer inflation fell to 17-year lows in the second quarter of 2016,[3] prompting the RBA to initiate two rate cuts in the following months. Rates have been at a record low of 1.5% ever since.
The local currency’s sharp decline in recent years had “assisted the economy in its transition following the mining investment boom,” according to RBA Governor Philip Lowe.
A rebounding currency complicates the central bank’s policy outlook. However, the consensus view is that the RBA will remain on hold for the next year amid prevalent risks around consumer spending and the housing market.[4]
The AUD may see heavy trading in the coming week as traders dissect a flurry of economic data. Reports on inflation, building permits, trade and inflation will make headlines throughout the week. The RBA will also hold its next policy meeting on 1 August, where interest rates are expected to be left unchanged.
[1] Craig Torres (26 July 2017). “Fed Says Balance-Sheet Unwind t Start ‘Relatively Soon’.” Bloomberg.
[2] Peter Martin (5 July 2017). “RBA cash rate: Concern about the dollar keeps bank’s hands tied.” The Sydney Morning Herald.
[3] James Stanley (29 June 2016). “Australian CPI at 17-Year Lows Further Opens Door for RBA Cuts.” Daily FX.
[4] Peter Martin (5 July 2017). “RBA cash rate: Concern about the dollar keeps bank’s hands tied.” The Sydney Morning Herald.
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