The Aussie dollar continued its recent bull-run this morning, moving upwards on continuing interest rate speculation and American dollar weakness. The Aussie is currently trading around at a 17-year high of 82.53 US cents.
Whilst the ongoing dialogue about rising interest rates is certainly adding strength on our end, the American dollar has been weak of late amid early signs of a possible trade war brewing between the US and China.
Following America’s decision last week to levy penalty tariffs on imports of Chinese coated free sheet paper, which drew strong condemnation from the Chinese, the latest punch has also been from the US – this time they have filed two new complaints against China at the World Trade Organization over copyright policy and restrictions on the sale of US movies, music and books.
It is unclear if China will take any action against the US, such as a mass sell-off of US Treasurys, but the potential trade war is adding downward pressure to the American dollar.
In other news from the US, following news yesterday that the Roy Morgan Consumer Confidence Rating hit a 12-month high, the US ABC News/Washington Post Consumer Comfort Index fell to its lowest point since late October on consistently rising petrol prices.
In the past ten weeks, US “gasoline” prices have moved up 64 cents a “gallon” to an average $2.80, while Australian drivers have been, at least to a small extent, shielded from such rises by our strong dollar – last week the Australian average petrol price was around $1.24/litre.
What does this strength in the Aussie mean for domestic interest rates? As Henry indicated last week in his article “Hawks vs. Doves at the Reserve“:
A rising dollar certainly helps contain inflation, but there is a lot of research that says this effect is small and hard to detect. There is no obvious negative correlation between CPI inflation and the value of the Aussie dollar.
Therefore, at its May 1 meeting, the RBA is likely to look straight past the currency and focus on First-Quarter CPI data, due April 24. With the TD-MI Inflationary gauge recently showing inflation to be running at 3.5% in the year to March, the outlook is not good.
Based on the February inflation gauge, TD-MI forecast the official CPI would rise by 0.6 per cent in the first Quarter. This should be enough for RBA to hike rates.
Read more at Henry Thornton.