Will the Aussie Dollar Keep Rising?

May 18th, 2015

The Aussie managed to gain strength earlier in the month, with the RBA cutting interest rates at the same time as downplaying the likelihood of further easing. With rates now at a record low of 2 percent, most economists are saying the RBA's cutting spree has now ended, with speculators pouring money into the Aussie as a result. The dollar has also been supported by resilient domestic economic data, with stabilising iron ore prices also having a big effect. Despite domestic strength, however, the future of the dollar is just as dependent on data from China and the US over coming weeks. ;

While the recent Aussie dollar move was partly based on speculation that the US Federal Reserve won’t be raising interest rates this year, many observers are expecting a move sometime before September. If they are right, the Aussie dollar's time above US80c is destined to be short-lived. According to LTG GoldRock director Andrew Barnett, "They will raise rates in the US and I think the Australian economy will continue to weaken and I suspect the Aussie dollar to be significantly weaker... I think the rally is going to be reasonably short-lived.” ;

The pace of contraction in China's factory sector is also likely to influence the local currency, with the Chinese economic news-flow dramatically deteriorating relative to consensus forecasts since as early as March. This would suggest the Chinese analysts’ models are somewhat out of touch with reality, with any further slowdown in the world's second biggest economy likely to have a huge effect on the Australian currency. ;

China has cut its benchmark interest rates three times since November 2014, with the banks’ reserve requirements also lowered twice to free up more cash to lend. Despite all the interest-rate cuts and cash injections, however, the broad M2 gauge of money supply in China slowed to 10.1 percent year-on-year growth in April, the weakest figure on record. This could darken the outlook for Australian exporters and create a downside surprise for the Aussie dollar over the coming months.