Markets are delivering some puzzling performance at the moment, influenced by changing currency dynamics.
Here at home, the Australian Dollar is under the spotlight with the government continuing to see it as the source of the country’s economic woes and the RBA citing it as the reason for the most recent rate cut.
However, we believe the RBA’s decision was driven not just by the rise in the Australian Dollar against the US Dollar (which at $1.04 had been relatively stable for over a year), but also the rise in the Trade-weighted Index basket caused by the fall in the Japanese Yen.
The story is also one of US Dollar strength rather than Australian Dollar weakness. Some of this strength can be attributed to recent discussion about the Federal Reserve tapering off bond buying and also the renewed interest in US Dollar assets.
Some good commentary from George Lucas of Instreet.