The Reserve Bank of Australia's latest attempt at "jawboning" the Australian dollar (AUD) downward has continued to backfire after the local currency surged past US81 cents this morning for the first time since January.
The central bank has long been targeting the US75 cent mark which it hoped to achieve following its latest interest rate cut, which took rates to a record low of just 2 per cent. Instead, the commentary provided by the bank spooked the market into thinking that the latest interest rate cutting cycle had come to an end, forcing the AUD higher.
Last night's surge came as a result of the weak retail sales figures that were released by the US Commerce Department. The data showed that retail sales were flat in April – compared to a 1.1 per cent rise in March – as consumers cut back their spending on big-ticket items, including automobiles. This is seen by many as the latest sign that the US recovery isn't progressing as strongly as first thought.
Rather than having to lower interest rates any further and risk causing further inflation in Australia's red-hot housing market, the RBA hoped that the US Federal Reserve would increase its own interest rates later in the year. This would have a positive effect on US bond yields, which would attract foreign investors away from the Australian market, thus weakening the AUD. Last night's retail sales figures show that such a move could be further away than anticipated.
What this means for you
As it stands, most economists believe that the Reserve Bank's interest rate cutting cycle has reached an end point, but the latest surge in the Australian dollar could mean otherwise.
A weaker Australian dollar is needed to help rebalance the economy and help make our exports more competitive in the global marketplace – especially considering the decline in key commodity prices over the last 12 months. As such, I expect a rebound in the AUD will only be temporary.
As some investors may have noticed, the recent strength experienced by the AUD had a negative impact on a number of Australian-listed companies with significant US exposure. That includes companies such as shopping centre giant Westfield Corp Ltd (ASX: WFD), share registry firm Computershare Limited (ASX: CPU) and global packaging company Amcor Limited (ASX: AMC), as can be seen in the chart below.
Those investors should also realise that when the AUD does drop, these companies could benefit in a big way (as they repatriate their earnings back to Australia, the weaker exchange rate strengthens their Australian-quoted earnings).
