The Australian Dollar (A$) (AUD) surged to its highest level in two years against the US greenback recently, but questions are now being asked about whether that is sustainable.
Right now, the AUD is fetching US79.18 cents. But it did climb as high as US79.85 recently, with some calls it could even rise as high as US85 cents. That no longer seems to be the case.
There were a number of reasons why the AUD rose so strongly against the US greenback recently, including:
- Rising commodity prices: Australia generates much of its income from commodities, so higher prices tend to be good for our economy;
- Interest Rate Speculation: Australia's cash rate sits at 1.5% but recent comments from the Reserve Bank of Australia were taken to suggest the central bank could look to lift interest rates sooner rather than later;
- U.S. Interest Rates: At the same time, the US dollar has come under some pressure on weak inflationary figures from that country, effectively undercutting forecasts for further rate hikes in the United States;
- Donald Trump: Political turmoil in the United States has also dampened hopes for Donald Trump's ambitious growth plans, forcing the US dollar lower against a basket of major currencies.
The AUD appears to have steadied, for now, partially thanks to clarification from Reserve Bank deputy governor Guy Debelle that the central bank's comments recently were not intended to signal an impending interest rate hike. According to The Sydney Morning Herald, market pricing of rate hikes had dropped to a 16% chance of a November hike and a 72% chance of a May hike. Those were down from a 28% chance and a 100% chance, respectively.
That will certainly appease the concerns of those investors exposed to businesses that generate much of their earnings overseas; a higher AUD is generally regarded as having a negative impact on those companies' earnings. Such businesses include Cochlear Limited (ASX: COH) and CSL Limited (ASX: CSL), together with Westfield Corp Ltd (ASX: WFD) and Amcor Limited (ASX: AMC).
However, if the AUD does retreat back to the mid-US70 cent range, there is no reason why the recent surge should have a major impact on their financial performances.
