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Australian dollar keeps climbing

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The Australian dollar’s climb above 80 U.S. cents isn’t the sort of development that policy makers and companies are likely to welcome, but the currency’s rally shrugged off weak inflation, technical sell signals and local central bank efforts to douse rate-hike speculation.

Reserve Bank of Australia Governor Philip Lowe said he was “very comfortable” with current policy settings, though a bit concerned about weak wage growth. Following cold on the heels of a chilling inflation report – all measures put the rate below the RBA’s 2 to 3 percent target range – his comments held the Aussie down for just over half a day. Swaps traders pared bets on rate hikes, seeing about 45 percent odds of an increase by next June, down from about a 55 percent chance priced in last Friday.

It seems nothing short of rate cuts in Australia or aggressive hikes in the U.S. will keep the Aussie dollar down. And the respective central banks made it clear that neither of those developments are likely.

The currency’s climb is tied to the general trend in perceptions for RBA policy. The market has become overwhelmingly focused on bets for tightening, running ahead of key indicators such as the price of iron ore, Australia’s biggest export.

While the key steelmaking raw material has jumped more than 30 percent since reaching a one-year low, it remains about 20 percent below its five-year average.

The Aussie’s strength is already complicating matters for Lowe as he seeks to bring inflation back up above 2 percent, with gains in the currency’s trade-weighted index helping to cool prices for so-called tradeables — goods whose costs are the most open to global influences such as currency moves. Any further sag in such prices would imply that core inflation will extend its record seven-quarter stretch below 2 percent.

Source: Bloomberg

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