Resilient: The Aussie is unexpectedly holding up. Photo: Virginia Star
The Australian dollar has confounded traders by holding steady despite further commodities weakness and a strong chance that the US Federal Reserve will next month lift interest rates for the first time in almost a decade.
In late local trade, the Aussie was buying US70.98¢, compared with US70.88¢ at the same time on Tuesday.
The currency had earlier shrugged off a further 4.5 per cent drop in the price of iron ore, climbing overnight against the greenback to about US71.40¢ before easing to US71.15¢ in early local trade.
National Australia Bank global co-head of strategy Ray Attrill ascribed the unexpected resilience to a range of factors, including renewed faith the Reserve Bank of Australia will leave the cash rate at 2 per cent despite its concerns about the pace of China’s slowdown and sluggish household wage and spending growth at home.
Market pricing of another RBA rate cut fell further after the minutes of the central bank’s November board meeting were published on Tuesday, predicting a 68 per cent chance of more cuts by July, according to Citi. Early this month, almost two full cuts had been priced in.
Mr Attrill also pointed to investors hedging against short bets (bets that the currency will weaken further).
“It is a bit odd coming in to see hard commodity prices under the pump, but the Australian dollar at the top of the G10 foreign exchange leader board,” he said.
“We can, I suppose, point to a further recovery in global equity prices off the knee-jerk moves lower on Monday morning, and a related fall-back in market volatility levels – [but] that doesn’t really cut it.
“The price action does speak to a market that is very short the Australian dollar and has a lot of bad news baked into the current price,” he said. Lower for longer?
But Capital Economics chief markets economist John Higgins said in a research note on Wednesday that the broader weakness resulting from years of declining commodity revenues, coupled with interest rate divergence, will hold down commodity currencies such as the Aussie and the New Zealand and Canadian dollars well after export prices have begun to recover.
“We think these [commodities export] prices are likely to recover a little next year, if not before,” he said.
“However, we do not expect this to fuel a rally in these countries’ currencies against the US dollar, given the outlook for monetary policy at home and in the US.”
Higgins says the eventual shake-out of high-cost resource producers will go some way to addressing the imbalance arising from China’s softening demand, although he says this will take longer in the case of iron ore and coal, Australia’s principal goods exports to the world’s second-biggest economy.
Nonetheless, broader economic weakness in Australia because of declining national income will force the Reserve Bank to cut the cash rate twice more, to 1.5 per cent, by the end of next year, he says.
This will force further depreciation in the local currency.
“We are not convinced that a turnaround in commodity prices will drive these major commodity currencies higher over the next year or so,” Mr Higgins says.
“The reason is that we think the previous falls in the prices of these countries’ commodity exports will act as a major drag on their economies, with the result that the stance of monetary policy will be looser than generally expected, unlike in the US.”
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