US Dollar is the Dominator for Now

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AUSTRALIAN DOLLAR PROVISION: FTAA

  • The Australian dollar is trapped in the US dollar vacuum
  • RBA rates come thick and fast, belt out
  • When it comes to economics, it doesn’t get much better than this

The Australian Dollar rallied at the end of the week despite the RBA delivering a high rate of 50 basis points on Tuesday.

Global machinations continue to plague the Aussie with the macro-environment playing from the traditional song sheet. Stock shocks pumped oil prices and other commodities higher, raising inflation expectations, raising the Fed’s rate hike, raising Treasury yields and strengthening the US dollar – sending AUD / USD lower.

This is a huge boon for the Australian economy. About AUD 10 billion enters the door every month of international trade and the longer the currency remains undervalued, the higher the domestic standard of living is enjoyed.

In times of crisis and / or uncertainty, markets err on the side of a correlation of 1 or -1 regardless of the nuances within each market. This is the situation for the Aussie, which sees its home economy in perhaps the best form it has ever been in, and yet the currency languishes.

The strength of the US dollar is reasonable due to the Fed’s rising interest rate. What seems to have been missed by the market is that the RBA has joined the race in jumbo exchange rates and has its ears pinned on governing an ultra-loose monetary policy.

The RBA does two things very well. They do nothing when nothing is justified, and they act decisively when action is needed. Action is needed here, and they go for it. The free money party is over. Conditions need to be tightened and as a consequence, tariffs are going north.

A quick summary of the key position for AUD:

  • Unemployment at 3.9% – multi-generational declines
  • AUD trade balance is 10.5 billion in April and is likely to improve on a commodity boom
  • MEP is 3.3% per annum
  • KPI at 5.1%
  • Currency rate at 0.85% and rising rapidly
  • Private and public debt at manageable levels

The RBA publishes a chart at the beginning of each month and the one below is just one page, which reveals a surprisingly positive scenario for the Australian economy. For a deeper dive, visit here.

It feels like we’ll wake up someday in the not-too-distant future when AUD / USD is the same and we’ll say, ‘Well, that makes sense.’

If that doesn’t happen, the RBA may have to go beyond “neutrality” to get the job the rate should do.

Australian Dollar Outlook: US Dollar is the Dominant for Now

— Written by Daniel McCarthy, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @DanMcCathyFX on Twitterr



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