Australian dollar breaks through US 80c

28 Aug 2017

By Shadforth Financial Group

The Australian dollar has moved higher against many global currencies over the past few months, breaking through the psychological US 80c mark in late July, the highest level in over two years.

There were a number of drivers for the move including higher commodity prices, iron ore was up 18.2% in July, and strong Chinese economic data which reflected increased foreign and domestic demand. Central banks also played their part with the Reserve Bank of Australia’s July minutes being taken as more hawkish than expected by the market. The US Federal Reserve’s more dovish than expected monetary policy statement also helped.

RBA minutes spook the market

The Reserve Bank of Australia left the cash rate unchanged at a historical low of 1.50% in July but surprisingly they opted to discuss the neutral nominal cash rate in the meeting minutes, stating that it had fallen to around 3.50% since the global financial crisis. The market overreacted to these comments, assuming the figure was an indication of where interest rates should be in the future and that an interest rate increase was near. Guy Debelle, the RBA Deputy Governor, had to calm markets shortly thereafter by stating that “no significance should be read into the fact the neutral rate was discussed”, and it is rather a “benchmark for assessing the current stance of monetary policy”.

US markets continue to hit all-time highs

US markets have continued to move higher despite continual disappointment in the Trump administration. Republican leaders in the Senate ditched their effort to repeal and replace Obamacare, also known as the Affordable Care Act. This raised more concerns over the cohesion of the Republican Party and the implications for proposed tax reform. The Russian question also continued to plague the administration, taking time away from meaningful issues such as health care and tax reform. The US dollar was weaker against many global currencies and sank to levels not seen since early 2016 on a trade-weighted basis.

China GDP growth remains firm

China’s economy remained resilient in the June quarter with GDP growth recording a solid 6.9% Year-on-Year (consensus: 6.8%), well above the government’s target of 6.5%. Primary industry growth which covers agriculture, forestry, animal husbandry and fisheries recorded growth of 3.8% (up from 3.0% in Q1). Secondary industry growth which covers mining, manufacturing, utilities and construction grew 6.4% (flat on Q1). Tertiary industry growth which covers services rose 7.6% (down from 7.7% in Q1). The overall result reflects the government’s coordinated push to maintain stable and sustainable growth, particularly ahead of the 19th National Congress later in the year.

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