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Surging Australian dollar means 'rate hikes are so far away'
Topic Started: 27 Jul 2017, 09:54 PM (553 Views)
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$A bulls review their hand at US80¢ after winning trade
Vesna Poljak

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The Australian dollar appears overvalued, strategists say, and its break above US80¢ puts the Reserve Bank of Australia's inflation target further out of reach, sapping enthusiasm for interest rate hikes.

The currency is trading at the highest level in more than two years as the US dollar sell-off intensifies, hitting US80.43¢ on Thursday and extending its rally this month to 5.8 per cent.
No rate hike: RBA

Reserve Bank governor Philip Lowe says the RBA does not need to move in lockstep with other central banks.

"It doesn't look like there's too much to stop the Australian dollar and our concern is that is adding extra deflation to the system which is unwelcome," said bond fund manager Charlie Jamieson from Jamieson Coote Bonds. "Rate hikes are so far away in our opinion."

The full hike that was priced in by the futures market last week has been almost entirely unwound. The implied cash rate in May 2018 has fallen to 1.62 per cent from 1.74 per cent a week ago.

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"Rate hikes are so far away in our opinion."
"Rate hikes are so far away in our opinion." Photo: Louie Douvis

On Wednesday, Reserve Bank of Australia governor Philip Lowe said there were two things holding back inflation from reaching the target zone: the weakness in wages and the appreciating currency. Dr Lowe's problems worsened less than 24 hours later.

"This is not a helpful move here, the dollar's up, not because Australia's is all of a sudden doing phenomenally better. It's up here because the US dollar's weak and in that sense it's a frustration for the central bank and the economy," said Peter Jolly, NAB's global head of research.
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Traders took a dovish view on the FOMC's July statement even though Fed chair Janet Yellen did not deviate from her guidance for further tightening. That was enough to vindicate the Australian dollar bulls who have seen the currency appreciate from US76¢ at the start of July.

"The warning is there that this trade is rather heavily owned already," said Sean Callow, senior currency strategist at Westpac. "This scale of positioning has been reached a couple of times over the last few years and it hasn't been sustained."

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The market is the most bullish on $A since March, according to Westpac.
The market is the most bullish on $A since March, according to Westpac.

Mr Callow cited the reported positions of leveraged funds which were net long 52,847 contracts of Australian dollar with a face value of $5.3 billion as of July 18, the most bullish since March 28.

"It's quite long, the speculators are already on board the Aussie so they have been participating in the past month's rally and they are getting to what looks to be reasonably stretched positions. There will be a point soon that they are waiting for somebody else to buy," Mr Callow said.

Westpac's fair value estimate is US76¢ to US77¢; "we do note that yes, iron ore prices have risen in recent weeks, but for us not enough to justify a rally of this size," the strategist said.

Mr Jamieson said the market had started the year anticipating 2.7 hikes from the Fed in 2017, "here we are and it definitely looks like they are going to pass on September," he said, with the December window threatened by the policy impasse brewing in Washington that could see a government shutdown.

It doesn't look like there's too much to stop the Australian dollar.
Bond fund manager Charlie Jamieson

The Fed is seeing desirable labour market outcomes under its current policy settings but this is not having any discernible impact of inflation.

"The [US] economic data's been reasonable, better than reasonable in some cases with the unemployment rate having fallen beneath 4.5 per cent," Mr Jolly said. "The surprise has been that we have not seen an associated uptick in wages and inflation figures." However, the NAB strategist remains confident that the Fed is "still on a modest tightening path".

The first estimate of second-quarter US growth is released Friday. The Atlanta Federal Reserve's closely followed GDPNow indicator foreshadows a result of 2.5 per cent; GDPNow will be updated overnight. Anything less could fuel further US dollar selling.

In Australia, even though non-discretionary items such as utility bills are set to rise and that is inflationary, "it's another additional minor income shock", Mr Jamieson said. "With the currency pushing more deflationary pressure into the economy, it is a concern."

Stephen Halmarick, chief economist at Colonial First State Global Asset Management, says there is no escaping the fact that a lot of global capital is entering the economy and that is outweighing interest rate differentials.

"On our side of the equation the narrowing of the current account deficit is a big factor, we've got the lowest current account deficit since the 1970s," he said. In the US, "It's hard to see a major fiscal package happening any time soon."


http://www.watoday.com.au/business/markets/currencies/a-bulls-review-their-hand-at-us80-after-winning-trade-20170727-gxk18e.html
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