Monthly currency review is below – thanks.
It was a totally average month for the Australian dollar. It weakened by 5.1% against the all-conquering British Pound, exactly the proportion by which, on average, the other dozen most actively-traded currencies fell. The Aussie faded by 0.5% against the NZ Dollar and it was down by a rather more significant 3% against the US Dollar.
Political and economic developments in Australia were more than a little overshadowed by the goings-on elsewhere. America's presidential election delivered a result which, in terms of its surprise value, exceeded even Britain's vote to leave the EU. Investors' initially-negative thoughts on the matter quickly turned positive when they considered where his policies might lead. Tax cuts and increased spending on infrastructure, should they materialise, would logically mean greater government borrowing, higher spending, accelerating inflation and rising interest rates. The market decided that Mr Trump would be good for the US Dollar and they bought it enthusiastically.
However, there was even more enthusiasm for the British Pound once Brexit-fatigue set in. Investors tired of selling Sterling simply on the back of rumour and guesswork. Whether Britain's departure from the EU will be good or bad for the economy remains an open question but, until the structure of that divorce becomes known, it is impossible for investors to make a considered judgment. Between Referendum Eve and the beginning of November the Pound fell by an average of 15.4%, losing 17.6% to the Aussie. In the last month it has recovered nearly a third of that loss as it seems speculative sellers have run out of reasons to carry on.
The two worries for the Australian Dollar are interest rates and credit ratings. Former Liberal Party leader John Hewson, who also had a stint as an economist at the Reserve Bank of Australia, maintains that Australia will lose its AAA credit rating. He told Sky News that "The fact that we are going to lose the triple-A credit rating is a foregone conclusion; it's just a question of timing." Higher coal prices are helping but the government's budget has been in deficit since 2008 and Treasurer Scott Morrison does not see the gap being closed until at least 2021.
At the same time there is renewed talk of RBA rate cuts. In the coming week the central bank will announce its monetary policy decision 24 hours ahead of the figures for third quarter gross domestic product. Whilst that chronology does not point to an immediate cut, GDP weakness could tilt the RBA towards consideration of the idea in the New Year. Less-than-perfect credit ratings and lower interest rates would be a clear threat to the value of the Australian Dollar.