The Australian dollar has been one of the worst performing currencies against the dollar this year. Year-to-date, the currency has dropped by almost six per cent as shown below.
The pair’s decline is mostly associated with the divergence monetary policy decisions from the Fed and the Reserve Bank of Australia (RBA). As you recall, early this year, the Fed got a new Fed chair after Trump replaced the then Obama-appointed chair, Janet Yellen. In his first major speech, the new chair said that the US economy was doing well and that he was committed to four interest rates this year. Already, he has made one hike and promised to have two more hikes this year. As shown below, the Fed has remained ahead of other central banks on rate increases.
On the other hand, the Reserve bank of Australia has remained quite dovish. In the previous statements, they have cautioned that while the economy was doing well, the committee was not expected to hike this year.
Today, the Australian dollar jumped after the RBA made the interest rate decision. As expected, the officials left rates unchanged at 1.50%. What pleased the traders was the bullish statement from the official statement.
The RBA governor, Dr. Lowe expressed confidence in the jobs market, ignoring the wholesale funding pressures that are threatening the property market through higher mortgage rates. These rates have partly increased due to the United States. Already, a number of small banks have raised mortgage rates which means that other large institutions will follow in that direction.
In the global scene, the governor expressed optimism that the country’s major trading partners were doing well with economic growth being realized in the United States, Europe, and in Asia. However, the governor was concerned about the outlook of trade as countries prepare for an imminent trade war.
In the domestic economy, the governor was hopeful that the economy was doing well with unemployment rate expected to drop. The forward indicators of employment such as vacancy rates show that the unemployment rate could drop below 5.5% where they were this year. However, the officials are still concerned about the slow rate of wage growth. On this, the governor said:
This is likely to continue for a while yet, although the stronger economy should see some lift in wages growth over time. Consistent with this, the rate of wages growth appears to have troughed and there are increasing reports of skills shortages in some areas.
In addition, the governor said that the GDP was likely to continue performing according to the expectations. The officials left the target of the GDP this year at 3.0%. On inflation, the officials said:
Inflation is low and is likely to remain so for some time, reflecting low growth in labour costs and strong competition in retailing. A gradual pick-up in inflation is, however, expected as the economy strengthens. The central forecast is for CPI inflation to be a bit above 2 per cent in 2018.
A key concern which the officials have repeated for several months is about the housing market in Sydney and Australia. Recently, data from Sydney has shown a major slump on housing prices, which have fallen to the lowest levels since 2009.