AUD, RBA, and the Fed – How to Interpret a Currency’s Fluctuation
The Australian dollar (AUD) is one of the currencies that performed best during the current global crisis. After the initial shock in March, when the world looked for the safety of the American dollar (USD), the AUD began a steady move higher.
It appreciated not only against the USD, but also against EUR, NZD, or the JPY. Is it something special that the Reserve Bank of Australia (RBA) did?
In Times of Crisis, the Focus Shifts to the Fed
Investors and traders must always be flexible when looking at a currency’s potential. On the one hand, local economic activity prevails most of the time. Monetary policy as well. For this, the central banks provide sufficient information and research for a proper understanding of how things work internally.
On the other hand, macroeconomic forces often dwarf local decisions. As such, a currency does not rise or fall only because the central bank changes its monetary policy outlook. The correct way to interpret things is to compare the central bank’s actions with other central banks of similar importance. The difference between their actions is responsible for the correct interpretation of a currency’s outlook.
The RBA sets the interest rate, the cash rate, eleven times a year. Every first Tuesday of each month, excepting January, it meets and looks at the Australian economic performance. It did so this August too, and two weeks later, today, the monetary policy minutes were released.
However, the AUD trend higher has nothing to do with the RBA actions. In fact, the RBA eased all this time the AUD appreciated. In other words, traders simply do not expect the market to move on anything the RBA does during the crisis, as the attention shifts to the Fed.
As a leading central bank, the Fed paves the road for other central banks’ monetary policy actions. This is specifically true when all countries face the same issues – high unemployment, businesses reluctant to spend, an increase in the number of bankruptcies, high personal savings rates, etc.
The pandemic-generated crisis differs from the 2008-2009 one. Back in those days, Australia’s economy, for example, was not affected. Local monetary policy prevailed. But nowadays traders must look at the big picture.
Coming back to the AUD strength, the negative impact a strong currency has on an economy was offset by higher commodity prices. If commodities reverse, the AUD’s fortunes reverse too.