Appreciation of the Australian dollar was initially held back by fears of a rate cut, but eventually the Reserve Bank of Australia actions, an easing of Covid restrictions in Victoria and rising property prices all contributed to a strong Australian dollar. But how did we get to this point?
Waiting on a rate cut
In early October, the RBA announced it was leaving monetary policy unchanged, but it did nothing to placate investors of their suspicion that there would be some sort of further policy relaxation in the coming month. A speech by RBA Governor Philip Lowe reinforced that idea, setting out several possible measures to support the Australian economy, all of which involved some form of monetary easing. However, in the end all the build up to the Cash Rate cut to 0.1%, and the announcement that it would buy $100 billion of government bonds which had hampered the Aussie for weeks and weeks, meant very little. It wasn’t hurt by the rate cut decision, probably because of positive news elsewhere. RBA Deputy Governor Guy Debelle put a spring in the Aussie’s step, telling a Senate committee that “it looks like the September quarter for the country probably recorded positive growth rather than slightly negative”. Optimists, and Government ministers, took this as confirmation that the recession is over.
Waiting on the US
The Australian dollar’s success owed a lot to the US narrative.
Initially the anticipation of a Biden presidency - as forecast by the opinion polls - which would facilitate international trade, and latterly by the likelihood that Mr Biden would indeed make it to the White House despite the misleading polls. The tense political atmosphere in the US, coupled with the Aussie getting caught in the US-China trade war crossfire, has meant that for a good few weeks the Australian dollar struggled. The heightened nervousness led investors to mark down the price of equities and “risky” currencies, including the Antipodeans.
Not waiting on data
The negative mood was sparked by the reinstatement of anti-Covid precautions in Victoria, which appear to have been very successful, with Australians said to be looking forward to a “normal” Christmas. Consumer confidence looks like it has bounded back up, with Westpac’s survey of Australian consumers putting the index at a seven-year high after a rise of 2.5%.
The latest purchasing managers’ indices for manufacturing and services were both in line with forecasts, as too was the consumer price index data, showing inflation rebounding in Q3 as prices went up by a quarterly 1.6%, the annual rate jumping from -0.3% to 0.7%.
The acceleration in inflation was mainly the result of an end to free child care in most states though. Still, housing costs failed to deliver the expected fall and car prices surprised with a 2.5% rise. Business confidence improved by five points to -10 in the third quarter, according to NAB.
All in all a very measured, positive picture.