While it may be the case that risk appetite has overstepped its bounds, many think the Aussie dollar is a different case. The Australian economy was able to avoid a technical recession and has maintained a significant rate advantage against most of its major counterparts. Yet, there is an equilibrium for even this outperformer through fundamentals and exchange rates. After appreciating nearly 35 percent against its US counterpart, market participants have already accounted for a significant head start for expansion and rising interest rates.
However, maintaining a positive differential on both these fronts with its industrialized peers doesn’t necessarily mean the economy will immediately return to an aggressive pace of expansion and rate hikes. In fact, the significant increase in the second quarter current account deficit – and more poignantly, the 19 percent drop in exports – reflects a severely stunted source of growth. The RBA is certainly aware of downside risks to growth going forward considering Governor Glenn Stevens, after the decision to keep the benchmark unchanged for the fifth month at 3.00 percent, said the current level was “appropriate for the time being.” This is clearly a wait-and-see move and it has certainly deflated expectations for a rate hike this year. Looking ahead though, the 2Q GDP data due tonight may bolster the case for a 25bps hike in perhaps November or December. The expected 0.2 percent performance for the period would be a moderation from 1Q; but the market will remain sensitive to upside surprises with public spending monitored for its ability to offset poor trade and corporate earnings data.