So much for a weakened Aussie dollar.
The Reserve Bank of Australia may have cut the cash rate yesterday, but after an early fall, the Aussie dollar shrugged of the record-making reduction and had one of its best days for several months.
The surge came despite a sell off on global sharemarkets that left the local futures market down 29 points, indicating another weak start to trading in a few hours.
US oil futures closed under $US40 a barrel for the first time since April, gold though edged a few dollars higher, but Wall Street ended the day with modest losses.
The US dollar weakened, and that helped the Aussie jump a cent to well over 76.30 US cents in offshore trading in Europe and the US before easing a touch to be just over 76 cents in early Asian dealings this morning.
It was a reminder that even at 1.50%, the Australian cash rate and the investments priced off it, represent good value in a world that is now dominated by negative interest rates led by Japan and much of Europe.
By comparison, the Fed-funds rate target is 0.5%. The eurozone’s deposit rate is minus 0.4% and Japan’s is minus 0.1%.
Australia’s 10-year bond yield hit a new all time low in local trading yesterday both ahead and after the RBA decision. It closed at 1.81%.
In his second last post meeting statement, RBA Governor, Glenn Stevens acknowledged the impact of a high dollar:
"Low interest rates have been supporting domestic demand and the lower exchange rate since 2013 is helping the traded sector. Financial institutions are in a position to lend for worthwhile purposes. These factors are all assisting the economy to make the necessary economic adjustments, though an appreciating exchange rate could complicate this.”
A year ago, the Aussie dollar was trading around 74 US cents, fell to a low of 68.65 in mid January, recovered to a high in April of nearly 78 cents, and has been in a narrow band since.
Analysts say the surge last night was due to investors looking for carry trade value, even at these low interest rates, especially from Japan.
Helping support the value of the Aussie dollar though has been the rebound in iron ore prices this year, and higher coal prices – although from the near record June trade deficit of $3.2 billion, you’d be entitled to wonder where the benefit was.
Many analysts though think the Aussie dollar will weaken in coming months – they were saying the same thing a year ago and apart from the January weakness, it didn’t happen.
For example, Marketwatch.com says Capital Economics expects the dollar to weaken to 65 US cents by the end of 2017.
