Is This as Good as It Gets for the AUD?
2017 has been a banner year for global economic growth, and that is putting pressure on central banks to adjust their monetary policies.
Just last week, the Bank of Canada (BOC) made the first interest rate hike in nearly seven years. As the Aussie hits a 25-month high against the USD, all eyes are on the impending RBA’s speech on Wednesday around the Q2 Consumer Price Index.
Meanwhile in the U.S. of A, the FOMC meeting on Wednesday will reveal the Fed’s interest rate decision followed by the Durable Goods report on Thursday, and the Q2 GDP assessment on Friday. Whew! As recent economic data suggests that the Fed’s 2% inflation target is at risk, Yellen has gone on record to say the Fed is continually reassessing the course of U.S. monetary policy.
Even with the USD in decline, many economists are doubting that the Aussie can hold up at this exchange rate against the greenback for much longer. With a slowdown in credit growth in China, an impending downturn in the Chinese economy is expected which may drop the price of a key Australian commodity: iron ore. If that happens, many professionals believe the Aussie will retreat back toward $.70.
What’s Going to Happen to Aussie Interest Rates?
The sudden spike in the value of the Aussie dollar (up 5% against the USD in the last two weeks) could eventually force the RBA to shift its focus from controlling skyrocketing housing prices in major cities to regulating the overall economy and inflation amidst a climate of rate hikes in other countries.
If the RBA does decide to hike interest rates later in the year, demand for the AUD may be bolstered by a rejuvenated appetite for carry trades amongst professional traders.
The Return of the Carry Trade
Carry trades capitalise on the interest rate differential between two currencies. Traders buy a currency with a high interest rate (such as the AUD or NZD) and fund it with a currency with a low interest rate (such as the JPY) pocketing between 2% and 3% on the differential.
If the RBA hikes interest rates later in the year or in 2018, it may stimulate foreign investment, and increase the value of the AUD further, which could take too high a toll on commodity exports. So the debate rages on: what is the right interest rate when growth is on fire but inflation is low.
According to the Financial Times, here’s what RBA deputy governor Guy Debelle had to say about it last Friday:
“While global influences, including monetary policy settings in other economies, have a significant impact on that assessment, they are, in the end, only one of a number of considerations to be taken into account.“
Those comments took a toll on the value of the Aussie and it dropped 1% against the USD in the aftermath. That said, with both the US and Canada hike rates, the question remains: how long will it be before Australia joins in?
When to Move Your Money
If volatility is wreaking havoc with your supply chains or overseas investments, consider the use of a Forward Contract to lock in an exchange rate for up to 12 months. With 2017’s global economic synergy surging, reserve banks will be increasingly pressured to take action, and so should you, because the volatility and unpredictability isn’t likely to abate anytime soon. In this economic climate, leaving your money at the mercy of the markets could be problematic.
If you find the exchange rate particularly favourable, you may want to employ hedging strategies, like transferring half of a larger sum, so you can cash in on a great rate while giving yourself room to profit if the exchange rate moves to an even better position.
If it’s time for your business to develop a custom currency strategy, call one of our dedicated dealers today.
IMPORTANT: The contents of this blog do not constitute financial advice and are provided for general information purposes only without taking into account the investment objectives, financial situation and particular needs of any particular person. OzForex Limited (trading as OFX) and its affiliated entities make no recommendation as to the merits of any financial strategy or product referred to in the blog. OFX makes no warranty, express or implied, concerning the suitability, completeness, quality or exactness of the information and models provided in this blog.
