The Australian dollar closed above 79 cents for the first time since May 2015 overnight, propelled higher by a combination of stronger commodity prices, US dollar weakness and optimistic views on Australia’s economic outlook from the Reserve Bank of Australia (RBA).
Here’s the scoreboard as at 7am AEST, revealing that the Aussie not only surged against the US dollar on Tuesday, but also against all of the major crosses.
AUD/USD 0.7915 , 0.0117 , 1.50%
AUD/JPY 88.66 , 0.84 , 0.96%
AUD/CNH 5.3395 , 0.0655 , 1.24%
AUD/EUR 0.6848 , 0.0055 , 0.81%
AUD/GBP 0.6069 , 0.0096 , 1.61%
AUD/NZD 1.0760 , 0.0111 , 1.04%
AUD/CAD 0.9994 , 0.0098 , 0.99%
Quite a performance, right?
The AUD/USD logged its largest one-day gain since March 15 this year, extending its rally from the low of .7152 struck on December 23 last year to over 10.5%.
In the past eight sessions alone it has surged over 4% against the greenback, leaving it sitting at the highest level since May 22, 2015.
The daily chart below tells the story.
It briefly hit a high of .7942 during the overnight session.
While another 3% rally in iron ore markets and continued US dollar weakness supported the Aussie overnight, Elias Haddad, senior currency strategist at the Commonwealth Bank, said that much of the move was underpinned by speculation that the RBA may begin to lift interest rates sooner than what many had previously thought.
“(The AUD rallied) because market participants seem to have interpreted the 3.5% neutral nominal interest rate estimate as indicating the RBA is behind the curve and may need to raise rates soon,” he said in his morning note.
While traders responded to the RBA’s discussion on the new neutral policy level by hoovering up the Aussie, Haddad says that markets may have jumped the gun in thinking it signals a near-term rate hike is coming.
“We continue to believe that the sharp AUD/USD upleg following the release of the RBA minutes is an over-reaction to the RBA’s updated estimate,” he says.
“The central bank takes the neutral interest rate into its long-run considerations, but adjusts short-term policy according to evolving economic conditions. There are no immediate implications for the RBA’s cash rate, and we continue to believe the RBA will only lift interest rates in Q4 2018.”
And Haddad thinks that if the RBA had its time again, it may have used a different method to communicate its updated views.
“Given the market reaction, the RBA may be wondering if they should have released their neutral interest rate estimate in a research discussion paper rather than the closely watched minutes.”
For a central bank that has been warning for a prolonged period that a higher currency would “complicate” Australia’s economic transition, it’s likely that question is being asked this morning in the RBA’s Martin Place headquarters given the Aussie’s stratospheric rise on Tuesday.
Rodrigo Catril, currency strategist at the National Australia Bank, said in his morning note that “a move above 80c looks to be just a matter of time”.
After being dominated by central bank and US politics on Tuesday, the movement in the Aussie today will largely be driven by sentiment given a dearth of market-moving events both at home and abroad on Wednesday.
Alex Heath, head of the RBA’s economics analysis department, will participate in panel discussion at the Australian Conference of Economists in Sydney at 3.30pm AEST.
Although markets will be clearly sensitive to any remarks from the RBA after the release of the July meeting minutes yesterday, Catril doesn’t believe she’ll discuss current monetary policy settings.
“Given the topic of discussion, our sense is that we are unlikely to get any comments on monetary policy or the exchange rate,” he says.
Outside of that event the economic calendar is bare until the release of building permits and housing starts in the US at 10.30pm AEST. Weekly US crude oil inventories will also be released at 6.30am AEST on Thursday.