Australian Dollar Rises After Chinese PMI Beats, RBA on Deck

Australian Dollar Rises After Chinese PMI Beats, RBA on Deck

Having kept the theme identical for an extended period of time, Governor Lowe has been concerned about keeping the currency lower but has never quite taken markets head-on like the RBA did last night. "The higher exchange rate is expected to contribute to subdued price pressures in the economy", Mr Lowe said.

"This much could trigger some renewed GBP weakness and boost the short-term volatility of sterling-crosses", CACIB adds. In other words, the RBA's fortunes are hitched to those of the White House.

"Next week's USA data (non-farm payrolls and ISM) could offer some support for Dollars but the releases may fail to ease the pervasive bearishness of the FX investors", CACIB argues.

The Reserve Bank has warned the resurgent Australian dollar is a risk to the nation's already-struggling economy.

With the AUD having rallied by 4 cents against the United States dollars since the last board meeting, the central bank could easily have shifted to more aggressively jawboning the currency if they were anxious.

In his statement, Dr Lowe said that although retail sales had picked up recently, "slow growth in real wages and high levels of household debt are likely to constrain growth in spending". The economy is nearly out of the reversal of mining investment that had been weakening growth of late - another bonus.

They're expected to show continued solid jobs growth in the United States with 180,000 new jobs created in July and a fall in the unemployment rate, coupled with subdued wages growth.

The Australian Dollar extended its gains from Monday following better than expected Chinese Manufacturing PMI data from Caixin. "An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than now forecast", he added. A factor working in the other direction is increased competition from new entrants in the retail industry.

"In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years", Lowe said. While some economists might argue high iron ore and coal prices justify a stronger Aussie dollar, the reality is mining companies aren't going to use the windfalls to invest and hire Down Under. It pointed to a gradually improving economy, though rising household debt remained a concern.

The low level of interest rates is continuing to support the Australian economy.

The RBA also remained fairly neutral in its outlook for future growth as it said "forecasts for the Australian economy are largely unchanged", which would suggest that the bank's quarterly Statement on Monetary Policy (SoMP) on Friday will not deviate greatly from the RBA previous forecast of 3% annual growth.