- Key AUD winners and losers on foreign exchange rate markets:
- AUD/EUR 0.64722 (-0.2%)
- AUD/GBP 0.55441 (-0.21%)
- AUD/NZD 1.07521 (+0.04%)
- AUD/USD 0.76991 (-0.21%
Currency exchange markets are flattish at Wednesday’s European open with the FTSE down -0.27% and the German Dax making a slight gain of 0.1%. This is following on from a hugely volatile few sessions, especially in the US with Tech names down heavily on Monday only to bounce back sharply on Tuesday. Tesla (TSLA), one of the top ten companies in the US by market cap, put in an astonishing 22% rally with the Nasdaq up around 4%.
Currencies have been less volatile, but the US dollar’s steady gains were dented on Tuesday as it pulled back from 92.5 to around 92 due to the risk-on sentiment and a fade in US yields.
Most US Dollar pairs are unchanged at Wednesday’s open with EURUSD and GBPUSD flat and AUDUSD –0.22%.
The Australian Dollar is particularly sensitive to swings in risk sentiment and has made its largest pullback against the USD since the September 2020 correction, dropping nearly 5% into last week’s lows of 0.762.
Data out of Australia is encouraging but the RBA seems unwilling to withdraw stimulus for some time, a point underlined in a speech made by the bank’s Governor on Tuesday night.
Lowe Sets the Record Straight
Ever since the vaccine roll out and the promise of a full re-opening, markets have been factoring in a strong recovery in growth and rising inflation. This has been seen by rising long-term rates, first in the US and spreading throughout most countries. Naturally, this has fuelled speculation that central banks will roll back stimulus and start raising rates, but this is not a message the banks have been keen to support. Lowe made this clear once again during Tuesday’s speech, stating:
“An important element of our policy package is the cash rate target being set at what is the effective lower bound of 0.1 per cent. The Board will maintain this setting of the cash rate target until inflation is sustainably within the 2–3 per cent range. It is not enough for inflation to be forecast to be in this range. Before we adjust the cash rate, we want to see actual inflation outcomes in the target range and be confident that they will stay there.”
Of course, this won’t stop markets anticipating inflation rising to and staying in the target area, but the message is clear and it will take a number of quarters (and other evidence) in the target range before the RBA will even signal change. Lowe tried to warn the market that the speculation was misplaced:
“As I discussed earlier, over the past couple of weeks market pricing has implied an expectation of possible increases in the cash rate as early as late next year and then again in 2023. This is not an expectation that we share.”
The risk for speculators is that there is an unstained spike higher in inflation that soon fades as pent-up demand and one-off factors arising from the lockdowns roll off. Sustained inflation is only likely when the jobs market gets tighter.
“For inflation to be sustainably within the 2 to 3 per cent range, it is likely that wages growth will need to be sustainably above 3 per cent. This is assuming that Australia generates ongoing growth in labour productivity and that the profit share of national income does not continue to trend higher,” Lowe continued.
Data in Australia has been impressive lately and the consumer sentiment release out this week shows numbers back near ten-year highs. Even so, the AUD is not likely to respond to anything but inflation and jobs data, and even these have less importance in the short-term until sustained trends. the Australian Dollar will get no help from the RBA.