Why is the Australia dollar rallying?

Robert Rennie, the Head of Market Strategy at Westpac, talks about the rally in the Australian dollar, and what it means for interest rates

Introduction: Why is the Australian dollar rallying?

Ross Greenwood: Let’s now go to the Australian dollar which has gone through 78 US cents over the weekend and has sustained that level today. Some are suggesting even the dollar looks as though it could have 80 in front of it very, very shortly. Now, that, quite clearly, is of concern because a higher dollar suppresses economic growth in Australia, takes the edge, if you like, of our exports; all these types of things. Now, sure, it might make it a bit better if you think about traveling overseas or if you’re doing some online shopping, but overall, for the economy, it actually is a drag on the economy.

Now, the natural thing, generally, if you’ve got the dollar going too high, it, generally, tend to get some interest rate cuts because that brings the dollar back under control. But

that’s something the Reserve Bank would be very reluctant to do because that could continue to fuel the housing markets, especially in Sydney and Melbourne, and that’s something the Reserve Bank does not want to do right now. Let’s get some greater insight into this with the Chief Currency Strategist at Westpac, Robert Rennie, who’s on the line. Many thanks for your time Rob.

Interview: Robert Rennie, Chief Currency Strategist, Westpac

Robert Rennie: Thanks, Ross.

Ross Greenwood: Okay. The prognosis for the dollar, what is pushing it higher, specifically right now, do you think?

Robert Rennie: Look, there’s two or three factors, really, pushing the Aussie dollar higher. One, of course, is the US dollar, remembering that when we talk about the Aussie dollar versus US dollar, US dollar weaker, therefore, Australian dollar stronger. Why is the US dollar weaker? Well, there is a clear and a rising sense within global financial markets that is probably unlikely that the Fed is going to raise rates aggressively from current levels, and, certainly, the testimony that we got from Fed Chair, Yellen, last week, seemed to confirm that. The market is a bit more downbeat on the outlook for the US economy, and that has weakened the US dollar.

Second reason, strengthen commodity prices. Every morning when we come into the office, we’ll look at the price of iron ore, and Friday, we closed above 65 cents. But have a look at Chinese steel prices. Rebar is above 4000 UN a ton. The last time that we saw rebar prices in China at these levels was about five years ago, and that strength in Chinese steel prices, and indeed the stronger industrial production in China GDP data that we got today, I think has been another factor behind the stronger Aussie dollar. So you put the three factors together: weaker US dollars, stronger commodity prices, and a keen sense that the Chinese economy is doing better, not surprisingly, the Australian dollar, pretty much, add to your highs.

Ross Greenwood: I was going to also ask you about China, because the annual GDP growth, going through the second quarter of this year, 6.9%, but it was a third consecutive quarterly print from The Chinese economy where it was a surprise to the upside now. Remember that the authorities here have got a target of around six and a half percent. Many people forecast it could get below 6% during this year. So 6.9%, really, suggests that China’s in better economic shape than many imagined it to be.

Robert Rennie:Yes, look, I think that’s a very good point. Ask any economist what their outlook for China will be in the next couple of years, and, certainly, through this year, and the answer to that question would probably have been weaker. What are the key points, though, I think, to bear in mind is, later on, this year, the Chinese government has it’s all important at National People’s Congress. This is the final part in this five-year cycle where we set the political scene for the next five years. And this is a very important one for Premier Xi in terms of him, potentially, setting himself up for his next term after this one.

I think most, including myself, have been expecting to see ongoing fairly steady growth in China until we get the National People’s Congress, but I think the outlook for Chinese growth later this year and into next year, given the debt issues that they have, is likely to be one of a weaker growth. That’s certainly one of the reasons that we actually expect a weaker Australian dollar as we move through the end of this year and into next year.

Ross Greenwood: And it’s not really odd because I mentioned interest rates at the very beginning. The normal response if the dollars is getting too hot is for the Reserve Bank to consider cutting interest rates. That’s not the mood as the way many economists are right now nor where the market is right now, where the anticipation is, if the next day rate rise is going to be anytime, most likely next year and most likely up, this does not, certainly, if you like, add to the argument to move rates anywhere right now.

Robert Rennie:No, absolutely. Look, Westpac is forecasting no change in rates from the RBA this year and indeed next year as well. I think, if anything, the key area of focus for the RBA would probably be on giving us increased guidance on the absolute level of the currency. Look, and as you mentioned, clearly, the strength that we are seeing in the Australian dollar– well, let’s face it, the RBA for the last what? 15 months has warned that an appreciating exchange rate could complicate the adjustment that we’re seeing in the Australian dollar and, certainly, at 78 cents that we’re currently at, it certainly does add a layer of complication for the job that the RBA has in hand, yes.

Ross Greenwood: Absolutely. Rob Rennie, always great to have you on the program. Chief Currency Strategist at Westpac, Rob Rennie, you have a great evening.

Robert Rennie: Thanks, Ross, my pleasure.

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