On Tuesday, the Reserve Bank of Australia kept interest rates steady at the historical low of 1.50% as expected. Further, the statement revealed that the growth expectation for the economy at large was maintained at 3% annually for the next few years. The Aussie, which so far has climbed over 10% against the dollar this year, has become a concern for some in Australia. The RBA did comment that further appreciation of the Aussie could weigh on inflation, growth, and employment in the coming months. Increasing attention to the appreciating Australian dollar only makes sense in an economy focused heavily on commodities and exports.
Although attention was drawn to the recent surge in the Aussie, some market participants have considered the comments to be relatively benign given the significant appreciation in the currency so far this year. If that is the case, then there exists room for another leg higher for the Aussie before any actions would be taken to alleviate the surge. Given the performance of the Australian economy, it seems highly unlikely that the RBA would cut rates further at this time. If iron ore continues its rebound from midyear lows, it could provide a further boost to the Aussie as terms of trade remain positive. The RBA may be more willing to let the currency appreciate further if the economy remains buoyed by a resurgent price for iron ore.
On Wednesday morning the ADP jobs number in the U.S. revealed creation of 178,000 jobs in July which missed estimates of 185,000. Even though the number shows that the U.S. economy is still creating enough jobs to outpace population growth and continue to lower the unemployment rate, the greater focus has shifted to wage growth. Wage growth remains stubbornly low, considering the unemployment rate of 4.4%, at only 2.5% annualized. The market will look to the NFP number on Friday and the accompanying wage growth data as a barometer for the likelihood of a third Federal Reserve rate hike this year. Should the data come in at a worse than expected clip, then the dollar may experience further pressure and raise the Aussie going into the weekend.
Another opportunity may exist for the Aussie against the Kiwi. If Australian growth remains strong, driven by an increasing price for iron ore and successful economical diversification into the growing education and tourism sectors, the larger Australian economy should outpace the smaller New Zealand one. Given stronger economic performance, the RBA would be forced over the next year and a half to adopt a more hawkish stance than its neighbor. As the Aussie is up only around 3% against the Kiwi so far this year, there may be further upside available in that cross than for the Aussie against the dollar. The path forward ultimately depends on the ability for the Australian economy to maintain its current growth and employment levels while generating sufficient inflation and wage growth. In the meantime, AUDUSD looks poised to reach further highs near 0.82 – 0.83.