Tiresome dollar debate. With the Reserve Bank meeting in Hobart tomorrow there is an upsurge of “will they or won’t they cut?” — “won’t” is the consensus from the market, but perhaps May or June is now the tip from the pet shop galahs. There’s no reason to cut — the economy is doing well and inflation remains low. But that pesky rising dollar is now top of the faux reasons from the pet shop mob — earlier it was offshore events and weak local growth. The rising dollar is now seen as a threat to exporters, the economy and possibly our way of life as we know it (does that sound familiar? It should, because it’s the sort of blather we heard and read when the dollar was around parity with the greenback, but hey, it eventually fell!) But has the dollar really risen to the point where it threatens the economy? Too many people look at the AUD/US dollar cross rate and not the Trade Weighted Index (TWI), which the RBA looks at.
On the TWI, the dollar has risen, but not by enough to cause worry. It has risen by just over 3% to 64.73 last Friday from 62.70 at the start of January. From the most recent low of 59.60 hit on January 20, the rise is larger — 8.6%. Against the US dollar the dollar is certainly up, from 73.06 US cents at the start of the year to 77.51 US cents in Australia on Friday night.
But nothing has happened to justify an RBA interest rate cut, and certainly nothing looks like supporting one — unless the wheels fall off the global economy or China. Those fears, which were high at the start of the year, have faded in recent weeks (as oil prices have risen). The Australian economy is not fading or flailing — as the monthly jobs reports are showing — as did last week’s survey of manufacturing activity, which hit a 12-year high. Housing prices are cooling, retail sales are rising, and services are solid. China’s slowing economy and its still obvious problems haven’t sunk the Australian economy, despite the outrageous claims that it would/could. — Glenn Dyer
America not fading. Friday night’s United States jobs report for March showed there were 215,000 new jobs, a rise in the participation rate, slow wages growth and an inconsequential rise in the jobless rate to 5% from 4.9%. Some of the American galahs changed their thinking on perhaps one rate rise this year from the Fed to “rate rise looms in June, or September”. If that happens, watch for that to provide some downward pressure on the Aussie dollar. But a rate cut here? Certainly ComSec doesn’t see a rate cut this year, but AMP’s Dr Shane Oliver is still in the market for one, and Goldman Sachs is as well. There is nothing happening in the economy that warrants a rate cut, so watch for what happens offshore. — Glenn Dyer
Commodities cool. Perhaps the biggest danger for Australia is cooling in the recent boomlet in commodities. Without too much fanfare the commodity rally lost momentum in the closing days of March and took another hit last Friday. That’s despite the sliding US dollar — which has done enough to limit the size of the turnaround so far. For example, iron ore prices are down 16% or more, according to the various price reporting groups since the peak in March of more than US$63 a tonne. Copper prices peaked at US$2.29 a pound in mid-March, but closed at US$216 a pound on Friday night, down almost 6% and within sight of the US$2.13 a pound it started out at in 2016. US and European oil prices are off around 6.5% to 7% in the past week, including 4% on Friday. That was after Saudi Arabia said it would only agree to an output freeze if Iran and all other producers did; Iran didn’t. And the key global commodity index from Bloomberg has fallen more than 4% from its most recent high on March 17% after rising more than 6% from the start of the year. — Glenn Dyer