Let’s go Down Under to start this fine Tuesday. The Reserve Bank of Australia stepped up and hiked interest rates another 25 basis points overnight. The benchmark rate now sits at a whopping 7.25% -- towering over the 3% Fed Funds rate here in the U.S. Most other major central bank lending rates fall short as well.
So you might expect the Aussie dollar to rally on news like this. And it did, just not after the announcement was made. AUDUSD actually tumbled when the word got out this morning. Right now it’s working to fight its way back.
The fact is, much of this interest rate decision had already been priced into the Australian dollar. That’s why the rally came well before last night’s announcement. Prospects of an RBA rate hike weeks ago have already flowed into the Aussie, and now there’s not enough buying power to give it that extra oomph.
Additionally, a lackluster report on Australian retail sales and trade deficit could have raised a few warnings signs. Expectations called for retail sales to move higher; they remained flat in January from the month prior. Plus, a wider-than-expected increase in the trade deficit isn’t a comforting feeling. Failing to make hay off strong Chinese demand, for whatever reason, raises some questions.
Needless to say the health of Australia’s economy stands well above the health of the U.S. And that should eventually allow the Australian to appreciate even further. It just may need a few days to gather itself.
Make sure you get a good seat for the rest of this week – there’s the potential for some major fireworks. The Bank of Canada, Reserve Bank of New Zealand, Bank of England, European Central Bank, and Bank of Japan are up this week. Most are expected to keep benchmark rates unchanged, but as always, it will be interesting to see how the market dissects the rhetoric.
And as we wind down the week we’ll eventually get to the U.S. Non-farm payrolls report on Friday. This big monthly jobs report always has the potential to excite. So stay tuned.
Posted by: Tom Yudeik on Monday, May 19, 2008
If the dollar index has hit a bottom back in March, how high would it need to climb (for a rally) to overcome the increased price in energy, metals, and food commodities? Credit and housing losses just can't vaporize! I think we're only 8 months into an 18+ month recession. The Wall Streeter's and the Feds are in fear of the inevitable! Thanks for your reply to my ? Tom Yudeik
Posted by: Jack Crooks on Tuesday, May 20, 2008
Agreed. Credit and housing losses can't vaporize. And this is a concern that hangs over the dollar. I think most people still expect the worst from housing. The wild card is the credit situation. If credit problems rear up again, and it appears the Fed has lost control, it will be very bad for the dollar and a new low will probably be made. Any bounce higher in the dollar should be coincident with a pull-back in commodities prices. At the moment, commodities and the dollar tightly negatively correlated. That can change. But the move into commodities looks as if it is playing somewhat of a hiding place for those afraid of the dollar. Thanks. Jack Crooks
Posted by: Mark Soderberg on Saturday, May 31, 2008
Hi, I enjoyed your comments on :Has the Buck Bottomed? But I have some difficulity viewing our decifit as having improved. It is so large that the small % of improvement is nothing and can't be of much help, right?
Posted by: Jack Crooks on Thursday, June 12, 2008
The reality is that the current account improvement has been significant. Also, as a currency trader I try not to pay any attention to the US Current Account. Despite the claims by the so-called "gurus" that don't trade the dollar for a living, the fact is there is absolutely NO CORRELATION between the US dollar and the US Current Account Deficit. However, there is a direct correlation between the amount of US dollar liquidity in the global economy and the Current Account. The last two times we have had an improvement in the CA deficit corresponded with major stock market crashes in 1987 and 2000; both were follwed by recession. So, if dollar liquidity is draining from the globe, and the Fed stops pouring in more liquidity (due to inflation fears), it could might be net postive for the dollar. Again, it goes to supply and demand. And again this is near-term stuff, because as I said, there is no correlation between the $ and the CA in any trading time frame we choose. The other view is that if we see a major stock market crash, foreshadowed by the CA improvement, then maybe the dollar spikes to a new all-time low. That is the other alternative as the dollar has been correlated with US stocks. But, I would add, that the dollar has had even a great correlation with crude oil. And a market crash would likely drag crude a lot lower given the implications for a decline in global growth. A fall in crude prices will likely be dollar bullish. So, as you can see by my roundabout answer, it is never a direct game. A + B rarely equals C in this strange world of investments.