This chart shows the mood of Australian households seems to rise and fall with the Aussie dollar

Today’s ANZ-Roy Morgan Australian consumer confidence data revealed another strong lift in sentiment levels.

As a result, confidence, at least based off this measure, is now back above its long-run average.

While ANZ’s head of Australian economics David Plank put the increase down to an “ongoing improvement in labour market conditions”, perhaps there was another factor that helped to boost confidence levels.

The surge in the Australian dollar, seeing it rally to the highest level in over two years last week.

This chart from Commsec’s chief economist Craig James is an eye-opener, revealing that where the Aussie dollar tends to head, confidence levels tend to follow, at least in recent months.

Source: Commsec

As we said, eye opening.

Could it really be as simple as sentiment being determined by what’s happening with the Australian dollar?

James says that the Aussie is an important factor, noting that the recent relationship between the two has been “fairly precise”.

This, he says, hints that many Australians still associate a stronger currency to a stronger economy, even if that is far from the case.

“Confidence levels posted the second best rise in three months in line with the best weekly gain for the Aussie dollar in four months,” he said following the release of the latest weekly report.

“Aussie consumers certainly love a firmer dollar. For many it means cheaper overseas holidays, a return to buying overseas goods online and even lower petrol prices.”

While they’re all factors that help to boost sentiment levels in the short-term, the problem is that prolonged periods of currency strength can, if unjustified, slow economic activity and with it employment growth.

That’s why RBA deputy governor Guy Debelle acknowledged last week that the Aussie’s recent strength is complicating Australia’s economic transition at its current level.

Should the Aussie’s strength persist, it raises the risk that the encouraging signals being generated by the economy in recent months could reverse just as quick.

That in turn could hurt economic activity, and weaken labour market conditions.

It’s unlikely that cheap petrol, an overseas holiday or cheaper online shopping will seem anywhere near as appealing should wage growth remain weak, or if unemployment levels once again start to lift.

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