Some investors are bullish on the Australian dollar, although there are still concerns about the Reserve Bank of Australia’s bond-buying program.
Australia’s central bank announced its decision to keep interest rates unchanged at 0.1 percent, keeping them at a record low and in line with analysts’ expectations.
Reserve Bank Governor Philip Lowe has announced that the board has no plans to raise cash rate levels over the next three years. He also announced the board’s decision to keep its bond-buying program under control, emphasizing its willingness to do more if needed.
Aside from the RBA announcement, this week has been somewhat slow in terms of the economic calendar. On Monday, the University of Melbourne reported that headline inflation rose 1.4 per cent (year-on-year) in November, after rising 1.1 per cent the previous month. It rose 0.3 percent month-on-month after a 0.1 percent decline in October.
The Australian Industry Group reported that Australia’s manufacturing sector expanded at a slower pace in November, with the manufacturing index at 52.1, after reading 56.3 the previous month. The Commonwealth Bank Manufacturing PMI, published by both the Commonwealth Bank of Australia and Markit Economics, signaled an expansion in the banking sector to 55.8 in November, although lower than expectations of 56.1.
The RBA said credit to the private sector rose by 1.8 per cent (year-on-year) in October, following a gain of 2.4 per cent in the previous month. This number did not change in the monthly statement.
On Tuesday, the Australian Bureau of Statistics reported that building permits rose 3.8 percent (month-on-month) in October, following a 16.2 percent rise in the previous month and beating forecasts for a 3 percent decline. Building permits rose 14.3 percent year-on-year, following a rise of 8.8 percent in the previous month.
The Australian currency has underperformed so far this week, losing 0.49 percent against the US dollar, snapping a four-week winning streak. November ended a good month for the Aussie, which saw it gain 4.54 percent against the greenback, recovering from a two-month losing streak.
Aussie volatility of late may be related to latest news from China. The Asian country reported that its manufacturing sector expanded in November as the manufacturing PMI rose to 52.1, beating expectations of 51.5. Similarly, the services sector expanded with the non-manufacturing PMI at 56.4, also higher than expected.
That ended up being good news for the Aussie, which started the week in positive territory, albeit with modest gains. However, early Aussie advances were undermined by the US government’s decision to add two Chinese firms to a defense blacklist, further affecting an already complicated trade relationship.
Some investors are bullish on the Australian dollar, although there are still concerns about the Reserve Bank of Australia’s bond-buying program. An example of this is Morgan Stanley’s expectation that risk currencies such as the AUD will ultimately benefit from the coming global economic recovery.
“The combination of strong growth, ample global liquidity and a solid fundamental outlook for risk assets suggests that risk-correlated currencies should continue to face tailwinds,” said a Morgan Stanley analyst.
However, this possible trend could be undermined by the Reserve Bank of Australia, as excessive currency appreciation could end up hurting the Australian economy.
According to the latest data, the Australian economy is struggling with the consequences of the coronavirus pandemic. The latest gross domestic product data, released in early September, showed the economy contracted more than expected, falling 7 percent (year-on-year) after a 0.3 percent drop in the second quarter. On a year-on-year basis, the data followed the same trend, falling more than expected to -6.3 percent, after a 1.6 percent rise in the first quarter.
All eyes are now on the upcoming National Accounts report, which will be released by the Australian Bureau of Statistics on Wednesday. Polled analysts expect a quarter-on-quarter expansion of 2.6 percent and a year-on-year decline of 4.4 percent.
Inflation is currently under control as the Consumer Price Index was last at 0.7 percent (year-on-year), in line with polled analysts’ expectations and higher than the -0.3 percent previously reported. Despite matching analysts’ forecasts, the number is still well below the Reserve Bank of Australia’s target, which is currently in the 2-3 percent range.
On the other hand, the latest unemployment rate came in better than expected at 7.0 percent in October, though it was up from 6.9 percent the previous month.
The Reserve Bank of Australia said in its latest report that the data “were broadly better than expected” and that Australia was currently on track for an “uneven and drawn-out” economic recovery. This recovery is also heavily dependent on political support, which will be needed for some time given the latest inflation and unemployment data.
Tomorrow RBA Governor Phillip Lowe will give a speech at 00:00 GMT.
Also tomorrow, the Australian Bureau of Statistics will release third quarter gross domestic product data.
On Thursday, the Australian Bureau of Statistics will announce the trade balance for October, followed by data on exports and imports of goods and services.
The Australian Bureau of Statistics will release retail sales data on Thursday.