The Australian dollar has shown a lot of strength lately, standing strong against the soaring US dollar and even beating it occasionally, while other currencies have surrendered.
Is the strength of the Aussie justified or do we have a case for it to catch up with its peers and fall? The answers are complicated.
The good:
- GDP grew at a strong rate in Q2. At 0.5% Q/Q it beat expectations.
- Building approvals grew at 2.5% in July, showing that the housing sector is still doing week.
- The ANZ Job Advertisements indicator showed a growth rate of 1.5%, which is an encouraging figure for the employment data later in the week.
- Chinese trade balance came out at a surplus of 49.8 billion, a record. In addition, both imports and exports were on the rise.
So, it’s all good? Not exactly.
The bad
- Starting from China, prices of iron ore are depressed, standing under $100 dollar for 15 straight weeks. This doesn’t bode well for Australia’s most important export.
- The independent HSBC Chinese Manufacturing PMI stands at 50.2 points, which reflects very weak growth.
- Ross Garnaut, a highly esteemed economics professor said that the economy needs lower interest rates and that also a lower exchange rate. He described the Australian economy as facing “very difficult circumstances”.
- Construction Work Done dropped 1.2% in Q2, much worse than expected, showing that the housing sector may already be over the peak.
And most importantly, what does the RBA think
The ugly
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.
This is certainly not the first time that we see this phrase: “A period of stability in interest rates”. Is the central bank going to sit on its hands forever?
So, what’s next for the Australian dollar?
See more in the AUDUSD forecast.