The Australian dollar is trading at six year lows against the greenback this morning. It fell to $0.691 at 9:30am AEST, down from $0.698 on Friday.
There’s been a lot pressure on the Aussie dollar of late. If it’s not falling commodity prices, it’s sluggish economic growth. This time though it was fresh US unemployment data that sent the Aussie tumbling to new lows.
Figures showed the US economy added 173,000 jobs in August, with unemployment falling to 5.1%. It marks the US’ lowest jobless rate since April 2008.
The uptick bettered expectations by some margin too. Earlier forecasts predicted unemployment holding steady at 5.3%. At 5.1%, the economy is now at full employment. In the eyes of the Fed, anyone who wants a job has one, or so the theory goes. Whether that’s actually the case is debatable. But the rate is symbolic nonetheless. It’s a sign of strength at a time when the global economy is unstable.
With the unemployment rate improving, all eyes are turning to the Fed’s upcoming meeting on September 16–17. The Fed is considering lifting interest rates for the first time in seven years.
Westpac’s Imre Speizer says the jobs figures could tip the balance in favour of a rate hike.
‘The eagerly awaited US payrolls report was strong enough to tip the scales towards a Fed rate hike later this month, and consequently dented risk appetite.
‘The overall tone of this report ticks the jobs box for the Fed, meeting their requirement for some further improvement in the labour market.
‘Many were braced for a weak number given August is seasonally notorious for initially undershooting before being later [revised] higher’.
The unemployment figures will play some part in influencing the Fed. But this ‘will they won’t they’ charade has been playing out for months now.
Truth is the numbers only slightly increase the odds of a rate rise. Why? Well, the Fed doesn’t actually want to lift rates. Doing so might dent hopes of a sustained recovery.
The Fed is worried about the effects of China’s recent economic slowdown. If the global economy is cooling, then it indicates poor future US growth too.
At the same time, the US has problems in its own backyard. Not every indicator suggests the economy is ticking along nicely. US manufacturing fell to a two-year low in August. Factory employment fell 17,000 during the month, the biggest fall since 2013.
Joe Hockey wants an end to interest rate uncertainty
Treasurer Joe Hockey has called on the Fed to end speculation over its monetary policy.
‘If [the Fed] don’t make a decision to increase interest rates then that could be more damaging and stir more volatility on international capital markets than if they actually did move’.
Hockey thinks it’s high time the Fed puts all the rumours to bed.
On the one hand, it would curb the currency volatility resulting from all the uncertainty. At the same time, he says a rate hike wouldn’t alter its position drastically.
‘[Even if the Fed raise rates], they’ll move from an ultra-accommodative monetary policy setting to an extremely accommodating monetary policy setting’.
Hockey’s right. Even if the Fed did lift rates, they’d still be lower than most economies elsewhere. The Fed will need several rounds of hikes just to match Australia’s 2% rate.
But rising US interest rates would weigh on the Aussie dollar immediately. That’s partly why analysts are so bearish on the Aussie’s future.
Analysts now predict the dollar falling to as low as $0.60 against the greenback by 2017. Deutsche Bank even forecasts a floor of $0.50 for the Aussie dollar.
Yet there’s no guarantee the Fed will take the plunge just yet. It could just as easily put off any decision for another few months.
That scenario makes the most sense at this stage. The US economy is growing, but the global economy has plenty of question marks surrounding it.
Better to sit tight then and see how it all unfolds. Any alternative might see the Fed play its hand too early.
Aussie dollar gains on other currencies
The Aussie dollar is performing better against other major currencies this morning.
The dollar is up 0.33% against the Japanese yen. It was buying 82.5 yen at 9:30am.
Meanwhile, it’s up 0.26% against the euro, trading at €0.621.
Across the Tasman, the dollar is up 0.15% against the NZD, buying $1.10.
Finally, the Aussie dollar is holding steady at £0.455 against the British pound.
Contributor, The Daily Reckoning
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