Australian Dollar Holding Firm Ahead of RBA Decision

Australian One Dollar Coins over Black
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The Australian dollar is unmoved ahead of the RBA’s interest rate decision tomorrow.

In early trade, the local currency was up slightly, trading at $0.7311 against the greenback. As of 3pm AEST, the AUD dipped slightly down to $0.7299. It did dip as low as $0.7294 this morning, following less-than-stellar manufacturing data from China. The Caixin PMI revealed that manufacturing in July slumped to its lowest point in over two years.

But that wasn’t enough to keep the Aussie down for long.

Poor economic data from the US helped offset the negativity from China, moving the AUD back above $0.73. US wages and salaries rose only 0.2% in the second quarter to July. That was down sharply from the first quarter, when wages grew by 0.7%.

The US dollar slipped against other major currencies on the back of these figures.

US interest rates and the Australian dollar

The wage data raises even more questions about the likelihood of a Federal Reserve rate cut this year. Many economists still tip the Fed to hike rates by September. Some are even forecasting two rate cuts by the end of the year.

Unless economic data improves, that timeframe could be in jeopardy.

The wage growth figures are even more concerning than they first appear. The figures are the lowest pace of wage growth available on record. A reversal of fortunes, over the next two quarters, is optimistic. And it may be enough to keep US rates steady.

That’s not good news for the Reserve Bank or the Aussie dollar. The RBA wants to drive the dollar below $0.70. The fastest way to achieve this is for US interest rates to rise. That would lift the US dollar up, placing downward pressure on other major currencies.

But economists remain convinced the US dollar will rebound in due course. Westpac’s strategist Imre Speizer predicts the greenback will regain strength in the medium term.

Whether this is feasible without interest rate hikes is up for debate.

In the event that the Fed does raise rates, investors will flock to the US dollar. The global economy is slowing down, and investors are seeking safety. Right now, there’s still no safer haven than the US dollar. That’s what the RBA is pinning their hopes on too.

Even a rate cut tomorrow, however unlikely, may only temporarily drive the AUD down. All eyes will be on the US Fed in the coming months.

Mat Spasic,

Contributor, The Daily Reckoning

 

PS: The Reserve Bank will fail to prop up the Aussie economy by pushing for a cheaper dollar. According to The Daily Reckoning’s Greg Canavan, nothing the RBA does will prevent a recession. Greg is one of the leading investment analysts in Australia.

In a free report, ‘Australian Recession 2015: Unavoidable’, Greg reveals why our first recession in 23 years is imminent.

However, there is hope for anyone who takes the effort to shield themselves from the fallout of the recession. Greg will talk you through the steps you need to take to protect your portfolio and wealth. To find out how to download the report right now, click here.

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