Record levels, not record gains; where to now?
• Aussie dollar posts highs yet performs modestly amidst RBA backdrop.
• Bank of China puts the panda on a surprise diet.
• Trichet up in lights with curve mentality.
The Australian dollar again reached record highs this week however the percentage gains were not as blue ribbon as in previous weeks. At 5am on Monday morning the Aussie rallied to fresh post float highs of 1.0421 after a strong lead by Wall Street and has since been trading in the 1.03s. The reason for the gains can be attributed to global markets but also the pressure on interest rates, highlighted by the commentary surrounding the rate decision this week. The commentary included that “the current mildly restrictive stance of monetary policy remained appropriate in view of the general economic outlook”. The RBA has the strengthening AUD undermining our exporters and weak export demand from Japan to thank for keeping inflation lower, referred to as the “heavy lifting”. Upward pressure on growth prospects however are coming in the form of capacity constraints due to QLD flooding reconstruction and continued mining investment in an already tight labour market. These tail winds may push the local unit higher and with a burgeoning recovery in the US and a potential continuation of the bull market, high 1.03s are easily justified.
With inflation data out of China mid this month, analysts expected the Bank of China to hold until then before potentially hiking interest rates. Instead the PBOC hiked interest rates 25bp this week (6.31%) in what could be described as staying ahead of the curve, as per our own central bank’s approach. This could be another tacit endorsement of the Chinese government’s ability to massage their macroeconomic policy, to limit the prospects for the feared “panda in the room” inflation environment. A combination of bank lending constraints and rate hikes are used frequently in China and the earlier than expected rate hike may be a signal that the PBOC believe that economic growth will continue and thus inflation (4.9%) is higher than their level of comfort.
How to cool an overheating economy is the contentious role for all central banks but the current disparities draw comparisons between Friedman & Keynes, Greenspan & Stevens. From China to Australia, we’ve seen a number of rate hikes since the initial GFC-inspired looser monetary settings. Being proactive with inflation has been a key theme by central bank chiefs since then and it is widely expected that we will see an interest rate hike out of the Eurozone on Thursday evening. This may be Jean Claude Trichet’s legacy to avoid another Greenspan, the easy target for much of the troubles surrounding the credit crisis of 2007, 2008. Furthermore, this week’s US FOMC minutes highlight the disparity of views between some officials in ending loose monetary settings, another endorsement of the “ahead of the curve” mentality. CPI in Europe however is not exorbitant and Trichet’s time may be better spent on fiscal amalgamation in key peripheral countries such as Greece, whose tax revenue policies are nothing short of an economic basket case. Failure of a rate hike on Thursday will see significant AUDEUR strength.
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