From the Kouk:
Over recent months, the RBA has been consistently suggesting the Aussie dollar has been overvalued, noting earlier this month that “further depreciation seems likely, particularly given the significant declines in key commodity prices”.
No doubt part of The RBA ‘overvaluation’ analysis was underpinned by below trend economic growth and a general tendency for the unemployment rate to climb from around 5.75 per cent to 6.25 per cent.
While the dollar may well have been overvalued (I doubt it given the 32 cent fall over recent years), the reasons for the RBA’s assessment are changing rapidly. These changes are dramatically diluting the over-valuation thesis and in the event are working to extinguish the case for any further interest rate cuts.
In recent weeks, the iron ore price has jumped 25 per cent or so and it now back to levels prevailing prior to the February 2015 rate cut, a time when the Aussie dollar was trading around currently levels. Other commodity prices are also marching higher, with the CRB index up about 8 per cent from its recent low.
At the same time, the RBA’s own economic forecasts have growth in Australia’s major trading partners accelerating into 2016, a time when there is a growing chance that real GDP growth in Australia will lift to 3 per cent and more.
What is even more striking is the surge in employment and the dip in the unemployment rate to 6.1 per cent. It is increasingly likely that we have seen the peak in the unemployment rate in the current cycle.
To be sure, the economy is not yet out of the woods – there are many lingering concerns and risks from soggy business confidence and weak consumer sentiment. But the fundamentals behind the RBA’s ‘overvalued dollar’ and the market view that interest rate cuts are needed are fading fast.
In February, I detected some of these changes and noted that the AUD was a buy and that it was time to prepare for higher yields in the bond market. This is now unfolding and with luck will run further in the months ahead.
Structure man, structure! These are cyclical bounces within secular trends the other way and hence entry not exit points.
