The Aussie dollar has defied the doomsayers’ calls for it to collapse into the mid and low 60s against the US dollar this year and, at 0.7709, is up around 6% so far this year.
There are a number of reason for this.
The US dollar has stopped rising as the Fed has dithered about when or if it will actually raise rates this year. Commodities have bounced strongly from their lows. Equity markets are themselves defying calls for big falls.
That’s particularly important because it has the double whammy effect because it improves overall risk appetite in markets. That then also improves the outlook for the Aussie dollar.
But the key reason, as Martin Whetton, the ANZ’s senior rates strategist, pointed out is that even with rates at low levels for the domestic economy, the collapse of global interest rates means these rates still offer a big pick-up to offshore investors who want to buy the Aussie and Australian bonds.
Nowhere is this pick-up to advanced economy alternatives more obvious than in central bank policy rates.
In a speech today Roger Brake, Tax Framework Division Head at the Federal Treasury, noted just how low and ineffective central bank monetary policy has become.
“Many advanced economies have run out of conventional monetary policy space with policy interest rates falling to historic lows and in some cases even being set at negative levels (Chart 6),” he says.
“A number of major central banks – particularly those in Europe and Japan – have resorted to unconventional measures, including purchasing an increasingly broad range of assets. Yet there is little sign to date that this is generating a recovery in inflation pressures.”
And his chart 6 explains exactly why the Australian dollar is so well supported. Not only is the pickup to other advanced economies so high that the Aussie is a “high yielder” but the prospect of further RBA rate cuts means investors can make a capital gain on their bonds, as well as currency.