The Australian dollar is the star performer on global currency markets on Friday despite a lack of any Aussie-specific drivers:
- The pound sterling to Australian dollar exchange rate is 0.98 pct in the red at 1.7031.
- The euro to Australian dollar is 0.64 pct lower at 1.4408.
- The Australian dollar to US dollar exchange rate is 0.5 pct higher at 0.9440.
(If you are looking to lock in this recovery in the Australian dollar, consider utilising a forward contract to protect against the potential for declines. If you want to buy Aus dollars and are worried about the resurgence in the currency you will want to transact at bank-beating exchange rates. Find out more about your options here).
"The Australian dollar climbed strongly as traders and analysts changed their view over a probable rate cut from the Reserve Bank of Australia, thinking that finally it won’t cut its benchmark interest rate further this year. The pair already gained roughly 30 pips since the opening against the dollar and trades now at 0.9442," says Vincent Pellizzari at RTFX.
Ipek Ozkardeskaya at Swissquote Bank says the Australian dollar's strength is unlikely to be challenged for the time being:
"The Aussie was bid across the board. AUDUSD advanced to 0.9448, with eyes set on two-week high of 0.9457, if broken will open the way to 0.9529 -month high.
"Tuesday’s hawkish RBA statement leads some players to bet on a potential rate hike on the way. The bias is on the upside."
Low interest rates are starting to work
The key to understanding the Australian dollar's resurgence is to understand the impact current interest rates are having on the economy.
"In Australia, signs continue to emerge that low interest rates are gaining traction in terms of economic activity," say ANZ Research in an economic note to clients.
The impact of low interest rates are being expressed via the housing sector.
House prices rose a solid 1.6% m/m and 5.5% y/y in September as elevated auction clearance rates point to double-digit national annual house price growth by early next year, with Sydney leading the way.
Internet search information suggests that demand for home loans continues to rise (see Chart of the Week below).
The RBA held the cash rate at a multi-decade low of 2.50% this week and said that its policy stance was ‘appropriate’.
While the Governor’s statement was very similar to that issued in recent months, it noted that the full effects of lower interest rates are yet to come through.
So with markets now realising the RBA sees little reason to cut interest rates further there is now room for a continuation of the Australian dollar recovery.