CANBERRA: The Australian dollar spiked from US70.80¢ to US71.20¢ after the Reserve Bank’s widely expected decision to keep interest rates on hold, and was at US71.35¢ in late afternoon trade.
Commsec economist Craig James said the Australian dollar had risen as “investors gave up on hopes for a rate cut in the future” but questioned this thinking. “It is clear to us that the economy is picking up momentum but there are still challenges ahead, so interest rates should remain on hold. But there is certainly no case for rate cuts.”
It is the sixth month in a row the Reserve Bank cash rate has been at 2 per cent, with most economists expecting no change until the first half of next year at the earliest. Earlier, the Australian dollar had a brief surge to above US71¢ before being brought back into range on Tuesday after the release of underwhelming trade data.
The local currency broke through US71¢ overnight as investors continued to be buoyed by weaker-than-expected US job numbers over the weekend and calmed fears of an October rate hike by the US Federal Reserve.
The dollar hovered just below US71¢ and lost two-tenths of a cent to trade at US70.7¢ about midday in its most significant tumble so far at 11.30 due to underwhelming trade data for August. The trade deficit plunged further to reach $3.1 billion. The market was forecasting $2.4 billion.
A week of mostly public holidays in China slowed the flow of financial data, so currency fluctuation this week will likely be caused by the US dollar, and particularly the release of the FOMC meeting notes later this week.
“The US dollar should trade in a choppy range this week because US interest rate expectations are unlikely to adjust higher for now,” Commonwealth Bank currency analyst Elias Haddad said.
“The Australian dollar should be supported versus the USD this week because the disappointing September US job report and ISM non‑manufacturing index has pushed out the timing of the first Fed rate hike, benefiting risk assets.” It may be supported for now but most analysts see it heading lower by the end of the year.
BetaShares chief economist David Bassanese said the dollar was likely to continue to fall over the year, estimating the real exchange rate was US66¢ and therefore the dollar was about 5 per cent overvalued.
“The Australian dollar seems to have already fallen a long way in recent years but further downside is entirely possible as it turns out the China boom did not usher in a new period of permanently higher commodity prices,” Mr Bassanese said.
BK Asset Management director of foreign exchange Kathy Lien said currency traders would be focusing on the Australian dollar, alongside the Canadian and British currencies as all three had central bank meetings this week.
FXCM chief currency strategist John Kicklighter said Australian currency traders would be holding their breath for the RBA rates announcement at 2.30pm even though no one expected any changes.
“In a world of quantitative easing programs, rate cuts do not generate the same level of economic leverage. Furthermore, with fundamental issues that are more concentrated on a relationship to China and are downstream of global demand (as most commodity producing economies face); there are limitations to how effective their efforts are likely to be,” Mr Kicklighter said.
