The Australian dollar has moved further away from the Reserve Bank's US75 cent target overnight with the local currency climbing past US82 cents on the back of strong local jobs figures and an unexpected strategic move by the Swiss National Bank. This move has widely been referred to on social media as "Francogeddon".
Jobs growth
Yesterday, the Australian Bureau of Statistics surprised the market with stronger-than-expected jobs figures. Although the unemployment rate still remains near a decade-long high, a strong upswing in full-time employment allowed it to fall to a seasonally adjusted 6.1%, which compares to the 6.3% that the market had been forecasting. While the reliability of the data is questionable, it does show that the Australian economy may be in a slightly stronger position than had been anticipated.
Francogeddon
The currency received a further boost overnight after the Swiss National Bank made a shock decision to end its three-year policy of capping the Swiss franc against the Euro. Under the policy, the Swiss franc was artificially held down against the Euro so as to protect against deflation and a recession.
Given that central bank officials had described the policy as the cornerstone of the nation's monetary policy just days ago, as reported by The Australian Financial Review, it's fair to say the decision caught global equity markets completely off guard.
As a result of the move, European stocks soared, Swiss equities plunged while the Franc gained nearly 30% against the Euro. In addition, the central bank also brought interest rates deeper into negative territory, cutting rates from -0.25% to -0.75%.
The decisions have damaged Switzerland's reputation for being a global economic safe haven, forcing investors to search for other alternatives. As quoted by Fairfax media, BK Asset Management managing director Kathy Lien said: "This resulted in money pouring into Australia and New Zealand, two countries still offering an attractive yield", thus forcing the Australian dollar higher.
What does this mean?
The Reserve Bank of Australia has been trying to force the Australian dollar lower in an effort to rebalance the economy. While a climbing dollar is great for Australian outbound tourists and for net importers, it does not fare well for net exporters or companies which generate a significant portion of their earnings from overseas. Such companies include Rio Tinto Limited (ASX: RIO), Cochlear Limited (ASX: COH) and QBE Insurance Group Ltd (ASX: QBE).
While the strong jobs figures and "Francogeddon" may have caused the local currency to bounce, there is little doubt that the Australian dollar will retreat from these heights. Given the strength of the US economy, the greenback will continue to strengthen which should see the AUD retreat further.
