These factors are pushing the Aussie dollar higher
The Australian dollar fell sharply at the end of last week, but only after it reached 80 cents for the first time since February 2018. Global factors have been important in the Aussie’s rise, with fellow commodity-sensitive currencies the New Zealand dollar and Canadian dollar also printing highs since 2018 during February.
The Bloomberg Commodity Index has risen 9% so far this year, again reaching 3 year highs. As for Australia’s top export, spot iron ore prices rose back above $170/tonne as China returned from the lunar new year holidays. Preliminary data showed Australia recorded a goods trade surplus of A$8.8bn in January, with the value of iron ore exports soaring 53% over the year.
History shows us that the Aussie dollar tends to outperform when the outlook for the global economy improves. This has certainly been the case in recent weeks, with growth forecasts raised on the back of the global vaccination rollout and US fiscal policy prospects.
Well over 200 million vaccines have been administered globally, with no major setbacks in terms of efficacy or side effects. This is raising hopes for a sharp rebound in activity by mid-year, especially in the US and UK. Indeed the British pound has joined the commodity currencies among the strongest major currencies this year.
The euro has been held back by the European Union’s clumsy vaccine rollout, with lockdowns weighing on first quarter GDP estimates. But this should change in coming weeks and months. Moreover, the EU has considerable fiscal firepower yet to be deployed to support the economy and investors welcomed Italy’s choice of former ECB president Mario Draghi as prime minister.
As for US fiscal policy, the Biden administration appears to be focused on pursuing the full $1.9 trillion rescue package without Republican votes in the Senate. This would equate to a massive 8.8% of GDP.
So although there have been bouts of turbulence in equity and bond markets recently, the underlying global investor mood still seems broadly optimistic, supporting the Australian dollar.
The domestic situation is somewhat more mixed. On the supportive side, Australia’s economy has mostly been stronger than expected over the summer. Employment has risen for the past four months and the unemployment rate fell to 6.4% in January, extending the decline from a peak of 7.5% in July.
In its February statement, the RBA said that “GDP and employment are expected to reach their pre-pandemic levels over the course of 2021, around 6–12 months earlier than previously expected.”
The stronger economic data and extremely low coronavirus cases around Australia reinforce global investors’ positive view of our currency. But the RBA’s policy stance is partly aimed at keeping a lid on the Aussie. At the February Board meeting, the RBA maintained the cash rate at a record low 0.1% and said it was unlikely to raise the cash rate until at least 2024.
The RBA also kept its 3 year government bond yield target at 0.1% and announced that once it had completed the purchase of $100bn worth of bonds, it would commence a further $100bn of this quantitative easing, effectively money printing.
RBA officials estimate that its policies have left the Aussie dollar as much as 5% lower than it would have been otherwise. But of course if optimism over the global economy supports commodity prices and Australia’s coronavirus outperformance continues, then it is likely to be bracing itself for the Aussie dollar to return to above 80 cents.
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Sean Callow is Westpac Bank's Senior Currency Strategist, based in Sydney. Sean focuses on the Australian dollar and other G10 and Asian currencies. He has worked in strategy and economics roles in New York, London, Singapore and Melbourne.