The Australian dollar has made a strong recovery in the last 2 weeks against its US counterpart, trading off a low of $US73.60 to around US76.00 today but the question is where to now for the currency?
Two of the main reasons behind the comeback are the recovery in iron ore prices, Australia’s biggest export, as well as growing expectations that the US Federal Reserve will not lift interest rates as high as earlier anticipated.
With iron ore around $56 a tonne the Aussie dollar may remain well supported if the prices keep moving higher as miners in Australia continue to pump out higher levels to take advantage of bigger profits.
If there is a reversal of trend, it may cause a domino effect and countries from all sides of the globe will feel the squeeze.
"As prices approach $US50 per tonne, we may start to see lower output from Russia, Canada and Ukraine. When prices approach $US45 per tonne, high-cost Australian and Brazilian miners could be under pressure to cut," the analysts said in a report.
The US Federal Reserve hiked interest rates last week by 25 basis points as was widely expected by the market but it was the following monetary statement that grabbed everybody’s attention with some analysts now believing that the Fed will cut back on the number of rates hikes this year with the possibility that there will be no more.
Some in the market were surprised that the Fed even lifted rates this time around, as the recent economic data out of the US didn’t warrant such a move.
In a speech yesterday Chicago Federal Reserve President Charles Evans noted that it would be prudent for the Fed to wait until the end of the year before moving on rates again.
He highlighted that inflation is well below the central bank’s target rate of 2 percent and further rate hikes are not yet justified, "I don't see why we would not be served to allow more time to wait," Evans told reporters.