The Aussie Dollar Hits a Two-Month High

The Australian dollar (AUD) has made a complete turnaround. The AUD had started to drop at the start of this year. Trading at a high of US$0.72, the AUD dropped to a low of US$0.68. It only took 11 days to achieve a 6.4% decline. However, I did say that the Aussie dollar has witnessed a turnaround in 2016. The AUD is now trading around US$0.73, resulting in 7.66% recovery.

Australian Dollar

Source: Forex Factory

A great week for the Aussie dollar

The AUD’s latest rally started in March. And if we want to get more specific, the rally kicked off at exactly 2:00pm AEST, 1 March. This was around the same time the Reserve Bank of Australia (RBA) decided to hold interest rates.

So let’s take a look at how the Aussie performed this week.

Monday, 29 Feb:

Glenn Stevens, head of the RBA, said in a statement:

The board judged that there were reasonable prospects for continued growth in the economy, with inflation close to target. The board therefore decided that the current setting of monetary policy remained appropriate.

Stevens believes low interest rates are supporting demand within the housing and exchange markets. And, by the use of supervisory measures, the risks these markets pose are contained. Or so Stevens believes. He notes:

Over the period ahead, new information should allow the board to judge whether the improvement in labour market conditions is continuing and whether the recent financial turbulence portends weaker global and domestic demand.

Keeping rates low also protects Australia from global turbulence. China, and their erratic behaviour, has played havoc on global markets. The biggest concern for the global economy is the pessimism that China’s spreading, hard as it may try to stem the tide of negativity.

What Stevens is implying is that low interest rates are set in stone for the immediate future. Stevens’ implications put upward pressure on the AUD, increasing the demand for the Aussie dollar.

Tuesday, 1 March:

At around 11.00am AEST, Australia’s quarterly GDP figures were released. Fourth quarter figures beat expectations of 0.5% growth by 0.1%. A major reason for the 0.1% gain was household final consumption expenditure (HFCE).

HFCE is the national account of consumer spending. It consists of consumption of goods and services in the economy. Therefore, if this number is higher, it means households are spending more. And more spending equals more growth. Economic growth is good for Australia’s currency.

Wednesday, 2 March:

US employment changes were released around midnight (Melbourne time). Figures beat forecasted values by 29,000. This means 29,000 more US citizens had jobs. Usually this would put upward pressure on the USD. In turn, that would weigh on the AUD. However, sub-components attached to the figures were disappointing.

US unemployment

Source: ADP, LLC, Moody’s Analytics

The worst performer was the manufacturing industry, losing 9,000 jobs. It was the second largest drop in five years. These minor details appreciated the AUD against the USD. And then, at around 11.30am, the AUD slightly bid up again. This time it was based on Australia’s narrowing trade balance.

Trade balance figures beat expectations by $28 million. Shown in the graph below, trend estimates are showing a declining trade deficit.

Balance on goods and services

Source: ABS

Thursday, 3 March:

At 12:30am this morning Australian time, US unemployment claims were released. All told, the figures were slightly disappointing. Unemployment numbers were 7,000 above expectations. Essentially that means 7,000 more people were added to the unemployment line.

The increase in unemployment bid up the AUD slightly. The AUD reached a two-month high of US$0.737, but has since slipped slightly from this number to around US$0.734. Australian month-on-month retail sales were also announced today. MOM sales were 0.1% lower, and could explain the AUD’s slight dip.

What’s ahead for the Aussie Dollar?

We won’t have to wait long before the dollar either rallies or drops. Tomorrow morning at 12:30am, US Non-farm employment changes will be released. Non-farm represents the total number of paid US workers of any business. However, this excludes general government, non-profit, farm and private household employees.

Non-farm data is hugely important in identifying the rate of economic growth and inflation. But for our purposes we will focus on its effect on the AUD. If non-farms figures come in lower than expected (195,000), the USD will likely depreciate, increasing the AUD/USD value.

Härje Ronngard,

Junior Analyst, Money Morning

PS: If you’re actively investing in Australian equities, you’ll know they’re almost as volatile as the AUD. While the market is improving, the ASX 200 is still down close to 5% for the year.

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