Australian dollars surges as markets predict more RBA interest rate hikes
The Australian share market has closed virtually unchanged for the week. While Wall Street has consistently pushed record highs recently, the local market consensus seems to be that Australia has an inflation problem and that at least one more interest rate hike will be needed to tame inflation. This is negative for shares. The Montgomery Fund’s Roger Montgomery said, “I will say that when markets go hyper exponential, so you know they head vertical, that’s usually unsustainable. And so some sort of a setback or a pause is typical.” As interest rate hike expectations remain, the Australian dollar has become more popular among international currency traders, “it’s actually one of the top performing G20 currencies at the moment and it’s all because of the hawkishness of the RBA. So, the RBA has been lifting rates despite the fact that many other Western nations have not, for some years. And so a lot of money is betting on further rate rises by the RBA, which raises the relative return of the Australian dollar versus other currencies.” By the close of trade, the ASX 200 had fallen sharply, shedding 113 points or 1.5 per cent on Friday, but the index is unchanged over the week. The index closed at 8,744.
The next big local macroeconomic event is the federal budget, but investors are now focused on ongoing tensions in the Middle East and whether the Strait of Hormuz will reopen. Roger Montgomery suggests the damage to the oil market has already been done. “So the consensus view is that even after the Strait of Hormuz has reopened, we could see persistent oil prices above $US90 a barrel. It’s unlikely and I don’t think many people are expecting the oil price to drop back to that $US55 to $US75 or $US80 a barrel that we saw prior to the conflict. So, with that in mind, and the futures curve certainly suggests that even though prices might fall, they’re not going to fall back to where they were.” He said.
Roger Montgomery said share investors are becoming increasingly cautious, “I think one of the big issues is there’s nervousness around valuations, particularly in the United States, and there’s uncertainty about what Donald Trump will do next. And so often you find at the end of the week, investors just don’t want to end the week (with) long stocks that they’re not 100 per cent convinced about and so, we see some pullbacks.”
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