Reserve Bank of Australia governor Glenn Stevens this week told economists to "chill out" about the chances of a December rate cut, but the relative heat of the Aussie dollar might make that hard for him.
Speaking to the annual Australian Business Economists forecasting conference in Sydney on Tuesday night, he made it clear a third cut to the cash rate this year, to 1.75 per cent, was extremely unlikely.
Indeed, Citi's interest rate futures market pricing gives it a 4 per cent chance, which is as good as zero.
However, if the recent recovery of the Australian dollar, not only against its US counterpart but against the RBA's closely watched traded-weighted index, continues apace, a cut in February – the next available opportunity – is not out of the question.
After flirting with six-and-a-half-year lows close to US69¢ in September, the local unit has spent most of this week above US72¢, touching a new intraday day high for the past month of US72.83¢ on Wednesday.
On Thursday, it dived more than one-third of a US cent after the release of much weaker than expected business investment data, but gradually recovered to US72.45¢ in late local trade, compared with US72.68¢ at the same time on Wednesday.
Bloomberg data compiled before Thursday's stumble shows the Aussie had gained about 1.6 per cent against the US dollar so far this month, and more than 5 per cent against the euro and the Danish krone. It is also stronger against fellow commodity currencies such as the New Zealand and Canadian dollars, up 4.5 per cent and 3.2 per cent, respectively, since the start of November.
Reflecting this, the Aussie has gained nearly 3 per cent on a trade-weighted basis, which represents a blow to the country's ability to consolidate the transition from commodities to services-led growth. It also reflects the currency's relative strength against sinking iron ore and coal prices, and the backdrop of slowing growth in China.
And it's not that the greenback is weakening. The US dollar this week touched an eight-month high against a typical basket of currencies, buoyed by a euro which risked sliding back to parity as the European Central Bank pondered more extreme forms of monetary easing.
This disconnection between the Aussie's movements and its fundamental drivers has flummoxed currency analysts, whose possible reasons include everything from short-covering by traders and hedge funds to a surge in Australian corporate and state bond buying by Japanese investors and Wednesday's $10.3 billion sale of the NSW electricity grid to a mainly foreign consortium.
"I'm not sure what the disconnect is, given we are seeing [that] iron ore just keeps slipping every day," JPMorgan's head of fixed income and currency strategy for Australia, Sally Auld, told Bloomberg on Wednesday.
"It feels a bit unsustainable, because if we are near US75¢ by year end, the RBA may start to get a bit uncomfortable, especially given what commodities are doing."
Nomura's chief rate strategist for Australia, Andrew Ticehurst, agreed, listing "the recent rise in the Australian dollar, against a stronger US dollar and in the context of weaker iron ore prices", as one of the arguments for another cash rate cut in February.
PineBridge Investments' managing director for global credit and fixed income, Steven Oh, attributed a lot of the Aussie's recent resilience to fallout from the US Federal Reserve's surprise decision in September to delay a long-awaited start to an interest rate increase, perhaps until next month.
However, this might not last, he said.
"I think with the Australian dollar, as well as with lots of other currencies leading up to the September meeting, there was an anticipatory decline versus the US dollar and I think you've seen some of that reverse in the proceeding months," he said on Thursday.
"So the potential impact that could take place in December is a retracing of the lows that we may have seen leading up to September."
