Glenn Stevens has done his part in weakening the Australian dollar. The rest is up to the Federal Reserve.
That message from the Reserve Bank of Australia sent the local currency to the best performance this week among major peers, climbing 0.8 percent against an otherwise dominant greenback. Governor Stevens sparked the biggest intraday surge in more than two months Tuesday by refraining from saying the currency is overvalued for the first time in 18 months, as he left the benchmark interest rate at a record-low 2 percent. The Aussie climbed further Friday after the central bank indicated unemployment had peaked.
“It would signal that the RBA’s easing cycle is finished, because there’s no need for them to keep cutting rates if unemployment isn’t going up,” said Richard Grace, chief currency and rates strategist and head of international economics at Commonwealth Bank of Australia, the nation’s biggest lender. “This could be enough to see the Australian dollar lift up toward 75 cents over the next week or so.”
The Aussie rose 0.3 percent to 73.67 U.S. cents as of 4 p.m. in Sydney from Thursday, and was set for its strongest weekly performance since mid-June.
Stevens identified 75 cents as his preferred exchange rate in an interview with the Australian Financial Review in December, when the currency was trading around 83 cents.
In his statement Tuesday, Stevens said the Aussie “is adjusting to the significant declines in key commodity prices,” compared with recent comments that “further depreciation seems both likely and necessary.”
The Bloomberg Commodity Index has slumped about 30 percent in the past twelve months, helping the Aussie weaken more than 20 percent versus the dollar. The currency touched a six-year low of 72.35 cents a week ago.
The RBA said in Friday’s quarterly update of economic growth and inflation estimates that the “unemployment rate is now forecast to remain little changed over the next 18 months or so,” despite data Thursday showing an unexpected rise to match a 13-year high of 6.3 percent in July.
Swaps traders have flipped bets on further easing, to less than 40 percent odds for another rate cut this year from a better than 60 percent chance a week ago.
The central bank isn’t predicting a stronger currency just yet. There’s “a reasonable chance that the Australian dollar will depreciate further” with the Fed expected to begin tightening policy before the end of the year, it said in Friday’s report.
Analysts agree. The median forecast in a Bloomberg survey predicting the Aussie will weaken to 71 cents by the end of March.