Monthly review of the Australian dollar is below - thanks.
As September dawned the Australian dollar was still suffering a hangover from events in China the month before. As a large consumer of Australian exports, the recent saga of negative economic forecasts emanating from Beijing has put significant downward pressure on the Aussie. The Reserve Bank of Australia’s (RBA) attempted cure for this economic headache was to be proactive in weakening the value of its currency to make exports more competitive.
Mixed fortunes followed the RBA’s actions. Positive export data for August was backed up by a relatively data-light start to September. In such circumstances, few political events are under scrutiny, so normal market forces take effect. As the Australian dollar is currently so cheap, the incentive was to buy rather than to sell, resulting in gains against most major currencies – recoveries were noted for AUD/USD, AUD/JPY and AUD/NZD.
Ultimately, however, the Aussie slipped to a fresh six year low against the US dollar, twice dipping below 70 cents, due to weak Chinese economic data and the potential for a hike in US interest rates later in the month. And with a potential property market crash in Australia on the horizon, many observers were predicting that things would continue to get worse before they improve.
In contrast, positive economic rhetoric from the Deputy Governor of the RBA, Philip Lowe, in which he claimed the recent ‘flexibility’ of the Australian dollar – following their attempts to lower its value – was pivotal in the upturn of the Australian economy in the wake of a slowing China, caused the Aussie to strengthen upon returning confidence. Upbeat tones that were echoed by his boss, Glenn Stevens a few days later, with the intention of giving off an air of confidence following the recent downturn in Chinas economy.
More negative data from the world’s second largest economy, this time concerning the falling price of raw and primary materials in Chinese industry – Australian exports are dependent on higher prices in these areas – was tempered by the news that unemployment Down Under had dropped to 6.2% and 17,000 jobs were added to the economy last month, when a mere 5,000 were expected.
Having won a landslide election in 2013, Tony Abbott was ousted from power in a party room coup by long-time rival and former investment banker Malcolm Turnbull, who became the new leader of the Liberal Party and Australia’s 29th Prime Minister in the process. Turnbull promised to focus on improving the country’s faltering economy, after Abbott was deposed following months of opinion polls showed his popularity with the public was at an all-time low. The result was therefore seen as a victory for political stability within the ruling party, which subsequently precipitated sanguine sentiment towards the prospect of economic stability for the nation. Consequently, the Aussie received a much needed boost in confidence, before hitting a two-week high.
More good news followed for the Australian dollar when the US Federal Reserve announced its decision to keep its interest rate unchanged. Only for a Fed official to announce, just a few days later, that a rate rise is still on the cards and he expects a hike by the end of the year. Triggering fears of a sell off for riskier commodity based currencies – a category which the Aussie firmly falls within. This claim was given further credence when Janet Yellen the head of Americas central bank, gave guarantees of an interest rate hike in the US before Christmas.
Despite the recent strength of the Australian dollar, the slowing Chinese economic growth profile does not bode well for its fortunes. This predicament faced by the world’s second largest economy may give rise to continued commodity price declines and significant Chinese yen depreciation, which could prove particularly negative for the Aussie.
Is an interest rate drop on the cards? With the risk of house price inflation a concern, the RBA’s next interest rate decision in the second week of October will be watched very closely.