Written By: Pedro Santiago – Forex Focus
Australia still has robust economic development, even if it has been somewhat weakened recently. The country is rated AAA. Among the G20 countries, Australia recorded the highest exports growth (7.2 percent) during the first quarter 2017. The latest survey from the Australian Industry Group revealed that the manufacturing sector in Australia continued to expand in June, and at a faster rate, with a Performance of Manufacturing Index score of 55. That’s up from 54.8 in May, and a move farther above the boom-or-bust line of 50 that separates expansion from contraction.
However, the Reserve Bank of Australia (RBA) is unlikely to move interest rates any time soon. The central bank is holding its key overnight borrowing rate at 1.5 percent. And it does not intend to change its monetary policy, as long as it considers gross domestic product (GDP) growth as not robust enough, and as long as its inflation target is not reached. Australian GDP growth was less than 2 percent in the first quarter 2017 (at 1.7 percent, the lowest level since 2016), but still beating expectations.
The latest GDP data was better than the 1.5 percent projected by a Reuters poll. On a quarter-by-quarter basis, the Australian economy grew 0.3 percent compared to the estimated 0.2 percent. As reiterated in its latest July monetary-policy presentation, the inflation target of the RBA is to achieve a rate of 2 to 3 percent in average over time. And the current inflation rate was 2.1 percent year over year at the end of March 2017.
Hypotheses around the possible rise of interest rates are ongoing.
Analysts at Barclays expect the RBA to tighten policy from the second quarter of 2018. “We forecast the hiking cycle to begin with a 25-basis point rate increase at the May 2018 MPC meeting, followed by two more hikes, of 25bp each, at the August and November 2018 meetings.”
But other specialists, such as the economists at Goldman Sachs, think that the RBA could start raising the rates in November of this year. In a report to clients, Andrew Boak, Goldman Sachs’ chief economist for Australia, wrote: “Over the coming months, we expect the RBA’s policy stance to evolve into an explicit tightening bias—as there is further evidence of a rise in global bond yields, and domestic wages/inflation.”
Today, the household-consumption increase is around 2 percent, while disposable income is stagnant and the wage growth index is increasing by only 2 percent year over year, a continual decrease since 2012. The most worrying indicator is the one for consumer confidence, which showed another drop in Westpac’s monthly sentiment index to a 12-month low. If that trend continues it could put at risk the RBA’s optimistic projections for annual GDP growth over the next few years.
The Australian dollar still benefits from rather good recent economic news.
On June 1, 2017, the Australian dollar traded at 0.73 AUD per USD. The Aussie rose about 0.3 percent to touch $0.7534 shortly after the GDP data was released at the beginning of June. The AUD exchange rate against USD is now clearly above 0.75 AUD per USD. It seems also that the currency exchange rate reacts quite immediately to such statistics as GDP or employment data. On June 15, the unemployment rate for May 2017 unexpectedly fell to 5.5 from 5.7 percent in April and below market estimates of 5.7 percent. It was the lowest jobless rate since February 2013, as the economy added 42,000 jobs while the number of unemployed declined by 18,600. The unemployment rate in Australia averaged 6.90 percent from 1978 until 2017, reaching an all-time high of 11.20 percent in December of 1992 and a record low of 3.98 percent in February of 2008.
At the same time, as shown in the graph below, the Australian currency rate was at $0.758 on June 15, 2017. On July 2, the Australian dollar was higher against the US dollar. In early trades, the local unit was trading at $0.7691, up from $0.7678 on June 29.
Yet, the economy may face some headwinds as wage growth is stagnant, the housing market is slowing and the subdued prices of iron ore, coal and oil as well as the slower growth in China may lower exports revenue.
For the future period, the volatility of AUD currency pairs such as the AUD/USD will likely still be high. For now, following the successive updates of economic indicators, the general trend of the Aussie dollar will probably go on moderately. But the real appetite of investors for Australian investments will definitely increase with hopes of high yields, which means interest-rate increases. And then the Australian dollar could strengthen even further.