Positive financial data released from the US saw the Australian dollar drop overnight in response. The US dollar is strengthening against other currencies around the world.
Through Wednesday, the Australian dollar dropped 1.2% to fall to 71 cents against the US dollar.
Figures from the Institute for Supply Management (ISM) show that the US services sector is expanding, and September was its biggest month yet for growth.
ISM’s non-manufacturing index shot up to 61.6 in September, which is its best return since it began ten years ago. This figure rose past the expectations of economists, who had predicted the index to only reach 58.
Further data from Moody’s Analytics and ADP revealed that jobs are on the rise in the US as well. Private companies added an extra 230,000 career positions last month, which was an increase on the 168,000 jobs added in August.
This news has seen the US dollar strengthen further and the country’s bonds yields experience an immediate rise. The US’ ten-year bond yield reached a high last seen in July 2011, and the 30-year bond yield climbed to its highest rate since October 2014.
The effect that this will have on Australia in the long term is unclear. While the Australian dollar is likely to struggle against the strong US dollar, this may not be a concerning issue for the Australian government, which could actually see the situation in a positive light.
The Reserve Bank of Australia (RBA) has already said that it is not looking to bump up the cash rate next year and wants to hold out until the start of 2020. This means that the Australian dollar may have to become the stimulus that helps drive the economy.
With inflation remaining steady, economists have been looking for a way to jumpstart the Australian economy without the need for a stimulus injection that may not deliver growth in the long run if it is the only way that the markets will acclimate.
Australia has looked to enable wage growth alongside an increase in jobs and a reduction in housing costs for a while now, and it seems that a currency with lower value against the US dollar may facilitate this occurrence.
Australian companies that have large amounts of US currency and generate a great deal of revenue in the US will benefit from transferring this currency back into Australian dollars. Many of these companies should see a bump in share prices as a result.
The Australian dollar is increasingly vulnerable because of the US producing record levels of steel, a commodity that Australia relies upon. The US should eventually see slowing growth amid its developing trade war with China.
HSBC Holdings Plc Chief Economist for Australia Paul Bloxham said that this news is “certainly helpful for the Australian economy” and noted that the loosening expected from the lower Australian dollar is something that RBA has wanted to elicit for years.
Bloxham, who expects the Australian dollar to drop to 68 cents against the US dollar over the next year, believes that these loosening levels will be equivalent to a 0.25% relaxing of the cash rate in the next nine months. He foresees this as having a positive effect on the Australian economy.