The Australian dollar hit a three-month high on Thursday as the United States cut interest rates and the likelihood of another 2019 rate cut in Australia faded.
The US Federal Reserve cut the US official cash rate by 25 basis points, to a range between 1.5 per cent and 1.75 per cent, which helped push the Aussie dollar to US69.24 cents on Thursday – its highest point since late July.
It was the third time the Federal Reserve cut rates in 2019, reflecting concerns about the strength of the US economy.
The Australian dollar had begun to edge higher on Wednesday after domestic inflation data met expectations.
There had been speculation inflation would be even weaker, raising the prospect of another interest rate cut, but Wednesday’s figures led investors to price out almost any chance of a cut at the RBA’s meeting next Tuesday.
Market expectations of an interest rate cut at the next RBA meeting
Australia’s weak inflation data had been a key reason why the RBA has cut rates three times this year to a record low of 0.75 per cent.
A strengthening dollar might be good news if you’re heading overseas on holiday, planning to buy some clothes from ASOS, or looking forward to cheaper fuel.
The 9 per cent drop in the dollar against the US dollar last year, for example, saw the price of unleaded petrol soar by 20 per cent, from $1.32 in November 2017 to $1.60 by October 2018.
But a strengthening dollar could also have a negative effect on our teetering economy, and create yet another headache for an RBA reaching the end of its rate-cutting capacity.
One of the RBA’s main motives in cutting rates is to maintain a weaker dollar to boost Australia’s export earnings.
AMP chief economist Shane Oliver said the Fed cut – along with stimulus in other economies – should help support global growth, which would be good for Australia.
But if the US continues to cut its interest rates – and Australia does not – that could push the Aussie dollar higher and, therefore, make it tougher for our exporters.
“A concern for the RBA is that with the Fed easing the interest rate gap between Australia, and the US looks like it might be bottoming, and if it starts turning up – particularly if the Fed eases further and the RBA doesn’t – then it could put upwards pressure on the value of the Australian dollar, which could offset part of the RBA’s monetary easing this year,” Dr Oliver said.
And that could solidify the case for further cuts to interest rates.
AMP has already predicted two further rate cuts – one in December and and another February, taking the cash rate to 0.25 per cent early next year.
“In fact, the Australian dollar is already up more than 3 per cent from its recent low and is breaking above US69 cents,” AMP predicted.
“So this is another reason to expect further RBA monetary easing, despite recent signs that the RBA is not in a rush to ease, despite another low inflation reading for the September quarter.
“A 3 per cent rise is the equivalent of monetary tightening of about 0.15 to 0.20 percentage points on the cash rate, so it’s undoing some of the work the RBA is trying to do to stimulate the economy.”
Dr Oliver said AMP’s expectation has been for the dollar to be about US65 cents by the end of 2019.
“We got very close to this, so I am sticking with that, but we may well have seen the low [for the dollar],” he said.
Senior currency strategist with Westpac Sean Callow said the market is forecasting a 25 per cent chance of a rate cut before Christmas, and 50 per cent on a cut in February.
Westpac is predicting the next cut of 25 basis points in February, while it expected the dollar to end the year on US67 cents.
“But a lot can happen in the next two months, especially in relation to US-China trade relations,” Mr Callow said.
Mr Callow agreed that the RBA would be watching a rising dollar with some concern.
“They [the RBA] seem pretty reliant on the Australian dollar remaining weak and would be very concerned if there a substantial and sustained rally in the Australian dollar.”