There was a sharp rally on Wall Street overnight following the US Fed’s decision to leave short-term interest rates unchanged at 5.25%. Unlike the RBA, the US Fed releases a statement accompanying a decision to leave rates unchanged, which enables analysts, investors and commentators to view any nuanced changes in the stated monetary policy.

From Henry’s reading of the statement, the most significant change in the recent statement from the last one, released January 31, was the concluding sentence.

January 31 – “The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.”

March 21 – “Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.”

The latest statement features more neutral language, which Wall Street took as positive news. The Dow jumped nearly 160 points (337 for the week), which has all but wiped out the falls of the previous few weeks.

In local economic news, the news is quite different. The Westpac/Melbourne Institute Leading Indicator, which measures the likely economic activity three to nine months into the future, was 4.8% in January. Although this is down from 5.4% in December, it remains well above the long term trend of 3.9%.

Another figure of concern for the RBA is wage price index. The Oz‘s David Uren explains: “Dr Edey cast the latest wage figures in a much more critical light than did the bank’s governor, Glenn Stevens, at a recent parliamentary hearing… Where Mr Stevens had said that wage increases “in the low fours” were acceptable, Dr Edey said the official wage price index increase of 4.0% in the year to December had been artificially depressed by the delayed Fair Pay Commission award.”

These two news stories, US monetary policy neutrality and gaining RBA hawkishness, taken together make up the backbone of the recent bull-run in the Aussie Dollar. This morning, the Aussie is pushing 81 US cents for the first time in almost 11 years. Some people are ruing this move, especially those in our struggling drought-stricken rural industries, as it makes our exports less competitive.

Chief Economist at Austrade, Tim Harcourt, says the story is a bit more complex than that. Harcourt says that “economic evidence shows that since the Aussie dollar was floated over two decades ago, exporters have got used to fluctuations in exchange rates as part and parcel of doing business off shore”.

If 80 cents is indeed the new 70 cents, it will be the first time the Aussie has found support over 80 US cents for quite some time. As this article from June 2006 shows, the Aussie has poked its head over 80 US cents only a couple of times since it first plunged below that level in the Banana Republic era. Henry may yet see Greenback parity again in his lifetime.

Read more at Henry Thornton.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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