Traders shrugged off the concern expressed yesterday by Reserve Bank Governor about the refusal of the Aussie dollar to fall by pushing the currency to yet another eight month high of 95.05 US cents in US trading early today.
It was the highest the currency has been since early November and the dollar is now at a level no one envisaged at the start of the year.
In fact the currency’s rise is acting as a defacto interest rate rise and damp[en economic activity – as it did in 2012 when it was above parity.
The currency’s decisive rise last night (it was trading around 94.50 in late trading in Australia) helped underline the change of emphasis on the currency in yesterday’s post meeting statement from Reserve Bank Governor Glenn Stevens.
While the RBA sat and didn’t change rates, the market did it for the central bank by pushing the currency towards 95 cents as they reckon the next move in rates will be higher – it won’t if the currency keeps on moving up.
Mr Stevens’ statement contained a rephrased part of previous statements which highlighted the central bank’s continuing frustration about dollar’s refusal to fall because of the sharp drop in our terms of trade and key commodity prices-such as iron ore and coal-over the past couple of years.
"The exchange rate remains high by historical standards, particularly given the declines in key commodity prices, and hence is offering less assistance than it might in achieving balanced growth in the economy," Mr Stevens said yesterday.
That is very different to what he said in the post-June meeting statement:
"The earlier decline in the exchange rate is assisting in achieving balanced growth in the economy, but less so than previously as a result of the higher levels over the past few months. The exchange rate remains high by historical standards, particularly given the further decline in commodity prices."
In other words the bank now sees the refusal of the dollar to fall as working against the direction of the economy in that the impact of the depreciation in 2013 is disappearing.
We might see another manifestation of that in the trade figures for May which are due out later today and forecast to show a small surplus after the surprise deficit in April.
It wouldn’t surprise if May shows a deficit, especially with the slide in iron ore prices not matched by the rise in export volumes.
And yet the tragics in the markets ignored the statement and up went the currency, above 94.50 USc after earlier being buoyed by the best news about Chinese manufacturing for seven months.
They think no change means the next move will be up – whenever that might be.
AUDUSD YTD – RBA sits on rates, lifts concern levels about dollar’s strength
The stockmarket though got another attack of the blahs, and down it went after the RBA statement came out at 2.30 pm, ending a small intra day rally.
The market finished the first day of the 2014-15 financial year as it ended 2013-14 – with a fall – 20 points instead of Monday’s 49 point slide.
It looks like starting with a rise this morning after improved futures trading overnight in the wake of Wall Street’s strong record finish.
In his statement, Mr Stevens again made it clear that interest rates were on hold for an extended period.
"Looking ahead, continued accommodative monetary policy should provide support to demand and help growth to strengthen over time. Inflation is expected to be consistent with the 2–3 per cent target over the next two years.
"In the Board’s judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates," the statement ended.
"In Australia, recent data indicate somewhat firmer growth around the turn of the year, but this resulted mainly from very strong increases in resource exports as new capacity came on stream; smaller increases in such exports are likely in coming quarters.
"Moderate growth has been occurring in consumer demand. A strong expansion in housing construction is now under way. At the same time, resources sector investment spending is starting to decline significantly.
"Signs of improvement in investment intentions in some other sectors are emerging, but these plans remain tentative as firms wait for more evidence of improved conditions before committing to significant expansion.
"Public spending is scheduled to be subdued. Overall, the Bank still expects growth to be a little below trend over the year ahead.
"There has been some improvement in indicators for the labour market in recent months, but it will probably be some time yet before unemployment declines consistently.
"Growth in wages has declined noticeably. If these and other domestic costs remain contained, inflation should remain consistent with the target over the next one to two years, even with lower levels of the exchange rate," Mr Stevens said.
Other data out yesterday showed a 1.4% rise in house prices in the major capital cities, almost reversing the May fall of 1.9%.
In a burst of realism, RPData’s Tim Lawless told Fairfax’s Domain Property section that the monthly figures were "relatively meaningless".
And there was a monthly report that was a bit more substantive – the Australian Industry Group’s survey of manufacturing activity which eased 0.3 to 48.9 which is into contraction territory.
The survey said manufacturers blamed the recent strength of the dollar (they got no relief yesterday).
The only sub-sectors to expand in June were food and beverages and wood and paper products.
The metal, machinery and equipment, and petroleum, coal, chemicals and rubber sub-sectors all contracted, the report showed.
