The Australian dollar was briefly back above 74 cents yesterday after the Fed left rates on hold and gave traders a signal that the likelihood of a rate hike in 2016 is receding.
That saw the US dollar weaken across the board which lifted the Aussie higher.
It’s down overnight. But at 0.7360 it remains much stronger than most forecasters expected and the RBA hoped.
Like any exchange rate, the Aussie dollar is not a one-factor model. Despite RBA governor Glenn Stevens’ often-cited desire for the Fed to hike, so the Aussie will fall, the Aussie’s day-to-day machinations are not just about the US dollar.
Rather, the Aussie is an amalgam of moves in the US dollar, RBA interest rates, interest rate differentials more broadly, commodity prices, investor risk appetite, the AAA rating and the actions of speculators.
But underlying all of these factors is the reality that the level of growth in Australia influences all of the above drivers.
That background makes this chart, which was presented at the Capital Economics conference in Sydney, an important and compelling reason why the Australian dollar has been and remains relatively strong.
Australia, the black line, is way out in front in terms of cumulative GDP growth since the GFC kicked off. And while the discussions about the collapse of the mining investment boom might make this seem somewhat historic, the latest GDP release for Q1 2016 shows that this growth outperformance continues.
That, and the continued strength in the NAB’s measure of business conditions and Westpac’s consumer sentiment survey, is what makes the RBA a reluctant cutter from here unless inflation collapses.
Traders know that and it’s a strong recommendation for the Aussie dollar to continue to outperform bearish expectations of its demise toward 60 cents any time soon.