IB FX View

Australian chief’s rethink propels Aussie dollar

Tuesday July 28, 2009

Comments from Reserve Bank of Australia governor, Glenn Stevens helped send the Aussie dollar to a 10-month peak in frantic trading as traders triggered stops while others went long for the first time as the central banker threatened the market with interest rate rises. The Aussie rose to purchase 83.39 U.S. cents earlier while interest rate expectations shifted dramatically as the governor observed that his local economy was likely far-less embroiled in the global financial meltdown than previously thought.


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Governor Stevens’ comments to a conference organized by Australian Business Economists possibly lay the groundwork for a substantial upward revision to the Reserve Bank’s growth forecasts due August 7. The last reading of the semi-annual report earlier this year predicted economic contraction of 1% for 2009 before 2% growth next year. However, a surprise 0.4% expansion in the first quarter and current evidence of improving domestic conditions as well as those in key Asian markets may force a sharp upward revision.

His comments surrounding the path of unemployment and its role in steering monetary policy are controversial at the very least. It’s well known that the Federal Reserve doesn’t like to raise interest rates when unemployment is still rising. But Governor Stevens noted in off the cuff remarks today that he isn’t aware of any “rule of thumb that we wait until unemployment is peaking before we lift the cash rate.” That single remark is enough to raise the anxiety level going into future meetings when interest rates are set. The governor remarked that the RBA must now find a way to return to normal when the right time comes.

The recent rebound in business and consumer confidence surveys have made the earlier projections look overly pessimistic. The underlying tone of today’s colorful commentary is to expect a faster rebound. Traders will now flock increasingly to the Australian dollar for fear that monetary and fiscal stimulus have been pitched at too vigorous a level, which inherently raises the odds that something will be taken away sooner rather than later. By removing the premise that a single economic variable would guide monetary policy has also increased the risks surrounding upside pressure on the currency. That creates an added conflict given the sizeable degree of currency sales enacted by the central bank during May and June.

The rally in the Aussie faded somewhat as the U.S. morning wore on thanks to Tuesday being a “risk-off” day. The dollar and the Japanese yen both improved, with the Asian unit trumping the dollar, which declined to buy 94.50. The dollar also improved against the euro to $1.4146 after an unexpected decline in U.S. consumer confidence to 46.6 in July after reading 49.3 in June. The prediction of 49 confounded analysts and has helped undo some of the recent rally in equities.

Demand for the safety of the Japanese yen picked up a little but the key will be how long this trend prevails. With everything we just noted above about perceptions of a more buoyant Australian economy, the prospects for its trading partners of Japan and China are also inherently better. Quite why the yen should turn on a dime as the S&P 500 index eases after rising to a multi-month peak seems pretty short-sighted. The euro sank to 133.60 against the yen.

While U.S. stocks fell somewhat on the decline in consumer confidence, there was further optimism for the housing market to be found in the Case Shiller house price index, which showed a quarterly rise in house prices between April and June. While prices were still 17% lower than June 2008 investors are clutching at signs of stabilization.

In the U.K. the Land Registry also showed that average home prices in England and Wales rose 0.1% in June making this the first gain in values since January 2008. The pound lost ground after a rally and currently buys $1.6422 versus the U.S. unit.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com

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