What's driving the Australian dollar?

31 January 2018

Given that Australia exports around 70% of its beef and close to 65% of sheepmeat, currency movements can have a significant impact on farm gate prices.

The Australian dollar has been on the march since early December 2017, largely against the US dollar – but what are its prospects for the months ahead?

US factor

An improving global economic outlook and higher commodity prices have been contributing factors in lifting the Australian dollar throughout January; however, the principle driving force has been in the US where tax reforms and government shutdowns have pulled the US dollar lower against most major currency pairs. Despite being only one month into 2018, the Australian dollar is currently US2.5¢ higher than at the close of 2017, trading close to US80.5¢. However, perhaps more indicative of the rise is more than a US5¢ lift since early December.

Short-term currency movements have been challenging for the competitiveness of Australian product in the already competitive global market. Forecasts from the ‘big four’ banks in Australia provide little indication of any long-term movements for the Australian dollar, given that predictions range from US70¢–US85¢ by the end of 2018. However, the banks do agree that how the Australian dollartracks against the US dollar over the next year will be determined by Australian and US interest rates, commodity prices and monetary policy revisions in other major global economies.

Key dates – Australia

31 January – Australia inflation rate issue (December quarter)

The Reserve Bank of Australia typically targets an inflation rate of 2–3% before making any changes to monetary policy. Consumer Price Inflation as at quarter three stood at 1.8% year-on-year and the market consensus for quarter four looks to be an estimated 2%. Should underlying inflation remain above 2% for a sustained period, monetary tightening could commence in the second half of the year.

6 February – Reserve Bank of Australia’s interest rate decision

The market sentiment appears to be that interest rate hikes are looking progressively unlikely from the Reserve Bank of Australia until late in the year, underpinned by the aforementioned inflation and an expectation that economic growth in China (Australia’s largest trading partner) will retract further in 2018, in turn reducing demand for Australian commodities. The current Reserve Bank of Australia interest rate stands at a record low of 1.5%.

Key dates – US

31 January–1 February – US Federal Reserve Bank’s interest rate decision

The consensus is that there will be little change to how US monetary policy will be managed with a new Chair coming to the US Federal Reserve Bank in February. The majority of financial institutions are forecasting three US interest rate hikes throughout 2018. The current Federal Reserve interest rate sits in the 1.25–1.5% range, with the expectation that the first increase will not occur until March.

2 February – US non-farm payrolls (January payroll)

Non-farm payroll data released this week will show the number of jobs added to the US economy in January (excluding farm workers). Achieving close to or above the consensus figure of 175,000 jobs added to the economy would likely strengthen the US dollar given the expectations of higher inflation.

Outlook

Given the aforementioned key dates, the Australian dollar could be set for a volatile week against the US dollar, however to what extent will largely depend on how closely the outcomes align with the markets expectations.

In US dollar terms, as reported on 25 January, saleyard heavy steers were US375¢/kg cwt across Australia. Based on the Australian dollar achieving the top end of the Australian banks’ forecast (US85¢), the same indicator would have been US393.5¢/kg cwt. In contrast, based on the lower forecast range (US70¢) saleyard heavy steers would achieve US324.1¢/kg cwt.

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