Even after a small pullback on Wednesday, the Australian dollar is still higher than where it was trading at before the Reserve Bank of Australia cut rates on Tuesday, taking its official cash rate to a record-low level of 1.50%.
The strength in the Aussie has baffled some analysts, along with the economic textbooks that would have you believe that the Aussie should have weakened following the rate reduction.
Plenty of analysts have had a crack at explaining the Aussie’s unusual strength, with broad-based US dollar weakness a common reason cited to explain the sudden bout of buying.
Richard Grace, chief currency strategist at the Commonwealth Bank, believes he knows what drove the Aussie’s ascent. However, instead of citing just one reason, he believes there’s eight factors that contributed to the move.
Here’s the list he outlined in a research note released on Thursday morning.
- The currency market was a bit short leading into the RBA announcement
- The RBA rate cut was almost 70% priced by the rates market
- It was economic consensus for a rate cut
- The RBA is cutting because inflation is low and real rates have therefore become elevated. The RBA is not easing policy because a sharp downturn in Australia’s economy
- Australian interest rates are still relatively attractive given low rates in the US and negative rates in Europe
- Commodity prices (outside oil prices) are continuing to recover. Iron ore prices are above US$60 p/t and Australia is set to record its first rise in the terms of trade in a number of years
- The global economy, including China, is growing only slightly below average, it is not collapsing
- It is difficult to make a case for the USD to strengthen enough to push the AUD materially lower. It is worth pointing out the RBNZ has delivered 125bpts of rate cuts since June last year and NZD is same level it was when it began the rate cutting cycle.
All valid points, and hard to disagree with.
However, as we pointed out yesterday, the move higher in the Aussie coincided with a steep drop in the USD/JPY shortly after the RBA decision was released.
Given the weighting of the Japanese yen in the US dollar index — 13.6% — the move in the USD/JPY saw the US dollar weaken across the board, including against the Aussie dollar.
As at 8.45am AEST Thursday, the AUD/USD buys .7588, up more than 0.5% from the levels it was trading at before the RBA rate cut was delivered.
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