Australian policy makers could be forgiven for reflecting on “the best laid plans of mice and men.”

For almost five years, Reserve Bank officials cheered for the U.S. to begin raising interest rates in the belief it would exert downward pressure on the Aussie dollar and boost exporters Down Under. Yet, when the RBA board meets Tuesday -- with policy expected to remain unchanged -- they will find three Federal Reserve rate hikes in six months has sent the currency up almost 7 percent.

“The Aussie is indeed ‘complicating’ the equation for the RBA,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. “A lower Aussie would certainly help support a broader range of industries, beyond the volatile commodity sector.”

As a result, expectations of a hawkish tilt in Tuesday’s statement may prove unfounded, given the last thing Governor Philip Lowe and his board want to do is fuel further currency appreciation. Part of the Aussie story is renewed strength in commodity prices that helped propel six consecutive trade surpluses, including a record one in December. Another is the weakness in the greenback as markets bet against the Fed meeting its rate hike forecasts; in addition, an upswing in Europe and elsewhere prompted talk of broader tightening.

“This theme of coordinated efforts appears to be emerging from major central banks, starting with Europe, as well as the Bank of Canada, the Bank of England and Norges Bank,” said Rodrigo Catril, a Sydney-based currency strategist at National Australia Bank Ltd. “All of that has lifted pricing expectations of hikes across many curves, including the RBA’s.”

Traders are pricing in a greater than 60 percent chance of the RBA raising rates from the current record-low 1.5 percent within a year, up from nothing just three weeks ago.

Economists are unusually divided on the rate outlook: five forecast the RBA’s easing cycle still has a little further to go; seven predict the next move from Lowe and his board will be a hike; and 11 see rates on hold through mid-2018.

The case for raising rates in many respects relies on the RBA’s forecasts -- that inflation will return to 2.5 percent, the middle of its target, and growth will accelerate to 3 percent, above the economy’s speed limit. Three bumper jobs reports add ballast to that view, though employment data are notoriously volatile, as does the synchronized upswing in the global economy. 

Former RBA board member John Edwards theorized last week that the central bank could raise rates eight times in the next two years to 3.5 percent.

The case for cutting rates rests on the fact that real wages are going backwards -- with little prospect of improvement due to high under-employment -- household debt is at a record, and the savings ratio is diminishing, suggesting a crunch on consumers is in the offing. That would mean a much softer economy.

As to the currency, Westpac sees little relief this year, forecasting a modest fall to 73-74 U.S. cents in the second half. The Aussie traded near 77 cents Friday. But the bank predicts a more notable depreciation next year to 65 cents by the end of 2018. Significant drops in the price of iron ore and coal are seen driving that decline

Source:
courtesy of BLOOMBERG

by Michael Heath

If you have any stories or news that you would like to share with the global online community, please feel free to share it with us by contacting us directly at [email protected]