Yet again, the high of the US equity market on Wednesday coincided almost exactly (in fact within 10 minutes) of the high of the AUD/USD exchange rate. The Aussie Dollar rose steadily through the whole of the Asia day and the European morning to reach a best level at 12.20pm of 0.7910; the first time it had been back on a 79 cents ‘big figure’ since February 20th. From its level at that point of 25,110, the Dow Jones Industrial Average then fell almost 430 points over the next 4 hours, dragging AUD/USD down to a low of 0.7870. Overall, however, the Aussie has been pretty resilient. The US stock market is lower than it was before Friday’s labour market numbers but AUD/USD is almost exactly one cent higher.
RBA Assistant Governor (Financial Markets) Christopher Kent yesterday gave a speech on developments in the Australian corporate bond market. He noted that, “accommodative monetary policies have encouraged greater risk-taking by both lenders and borrowers. This is one of the important ways in which the monetary transmission mechanism works. It has supported the decline in spreads and other positive developments I've just discussed. At the same time, however, the combination of low interest rates and low volatility in financial markets is of concern to the extent that it can lead to excessive risk-taking via a search for yield. This is something that the Reserve Bank has been noting for a time.” He wasn’t ringing any bells at all, but if credit spreads do widen or volatility picks up again, then the RBA has shown that it is on the case.
As for incoming economic data, Westpac’s Index of Consumer Sentiment rose 0.2% to 103.0 in March from 102.7 in February. Their analysts noted, “Sentiment continues to hold in slightly optimistic territory with March marking the fourth consecutive monthly reading above the 100 level. That followed a year in which pessimism dominated. However, the index is still well below levels typically associated with a robust consumer.” The Australian Dollar opens in Asia this morning at USD0.7875, with AUD/NZD at 1.0745 and GBP/AUD1.7725.