So the Australian dollar is hovering above, at or just under the 80 US cent level, depending on the time of day in the trading cycle.
It finished above 80 USc Tuesday night and started trading around that level here today.
It’s risen to what is about its highest level in 10 years and analysts are all saying it was as a result of the low key warning on Friday by the Reserve Bank’s Deputy Governor, Malcolm Edey that some of the factors which pushed up inflation were still evident and still a concern.
Mr Edey is the RBA’s chief economist: he is the Deputy Governor, economic, and that probably makes him almost as influential as the Guv, Glenn Stevens.
That’s why his words last week were important where as a similar speech at the start of the month was not taken as seriously because they didn’t include phrases used on Friday.
This is the key phrase: “This outlook is still higher than ideal: it implies that inflation is more likely to be too high than too lower in the period we can foresee”.
It’s called jawboning, a word I’ve used many times to describe speeches by key officials in the US and here. Edey’s speech was no different.
Although it was a statement of the obvious to some in Australia, it also came as traders in the US started wondering if there was a chance of rates being cut this year, rather than left on hold.
Even though some looked at US producer and consumer price indexes last week as suggesting that inflation was returning (albeit in a small way), others looked through the figures, factored out volatile oil and food prices and said no way.
Then there’s the US housing slump and the problems in the subprime and lower levels of the prime mortgage markets which show no signs of improving. This week sees a number of key figures for the housing industry and the betting is that the problems still have a way to go before things get better.
Housing starts rose 9 per cent in February, settling some immediate worries.
In Tokyo the yen fell to a two-week low against the euro on a belief (well founded) that the Bank of Japan policy makers would not move rates yesterday; they held rates steady at 0.5 per cent.
The yen also slid against other major currencies after the strong gains in world equity markets saw traders engaging in carry trade deals: as a result they chased higher yielding currencies such as the New Zealand and Australian dollars (there is a 5.75 per cent gap between Japanese and Australian official rates.)
And the currency jumped half a cent from Monday’s close of 79.54 USc and more yesterday. It then retreated under the 80 cent level. To finish around 79.92 USc in Australia.
The Aussie has traded above 80 US cents just one day since 1996 and that was in February 2004 when it touched 80.05 USc, according to traders yesterday.
It’s at the highest since December 1996 and this latest increase (it has approached this level a couple of times in the past 10 months) is more to do with the combination of carry trade deals involving the yen and a market here receptive to suggestions that interest rates could rise.
The US Federal Reserve meets this week and that’s also making some traders wonder if a strategic thing to do in the run up to the announcement of any interest rate move later this week might be to go long Aussie dollars.
Also the improvement in the economic outlook evident over the past couple of weeks does hold out the prospect of a possible increase in rates but it also means growth prospects here, given our 6.25 per cent official rates, are not too shabby compared to the US.
The Aussie hit 80.33 US cents yesterday morning before retreating.
If the currency stays around this level for some time (a week or so) you can expect some buying demand from exports seeking to protect revenues: you can expect others to hold off repatriating money back into Australian dollars until they see the currency easing back towards the 76 US cent level.
If this strength persists for too long then some of the projected income for big exporters in the resource sector might be shaved a little and force analysts to redo their models.
It would also introduce a note of volatility into earnings and share prices, as well as helping take some of the inflationary heat out of imports oil and petrol, among other things.
