X Factor Down Under Is Currency Gain: Australia's Week in Charts

(Bloomberg) -- The resilience of the Australian dollar around the 80 U.S. cent mark, as a stellar jobs report overrode sagging sentiment indicators, highlighted the conundrum that had a central bank board member pouring scorn on speculation about interest-rate hikes.

A stronger currency may delay a lift in borrowing costs and markets remain consumed by concern that the currency Down Under is worth more than the country can cope with. Just this week in the release of Apple Inc.’s $1,000 iPhone X, Australian shoppers learned they’d have to pay a 25 percent premium to buy it in Sydney or Melbourne.

The Aussie is holding onto an 11 percent gain this year, despite remaining down from its two-year high reached last Friday. The currency hasn’t rallied like this since its blistering gains in 2009-10 took it to unprecedented heights above the $1 mark, but that rally came when the Reserve Bank of Australia was busy tightening policy.

While swaps markets are betting the RBA will be doing so within a year, board member Ian Harper says economic growth needs to get a lot stronger.

“Why would anyone be suggesting tightening monetary policy when the economy is operating below potential? I mean hello?,” Harper said in a phone interview Wednesday.

Aussies hoping to buy the new iPhone are likely to be forking out more than most countries, with the initial pricing showing a 64-gigabyte model X will go for $250 more Down Under than in the U.S. Commonwealth Bank of Australia’s securities unit pointed out that even the pricing gap for the current iPhone 7 (and the current iPads) suggests the Aussie dollar is 5 percent to 10 percent overvalued at current exchange rates.

Aussie dollar strength works to cool gross domestic product growth as consumers at home and abroad are deterred by the price impact, revenue from commodity exports become less valuable and costs to borrow abroad can be lifted. Such gains can be welcome if they prevent a robust economy overheating, but that’s not what’s going on now.

Harper acknowledged the stronger Aussie could put a brake on growth, but said there was little the central bank can do to stop it at the moment when much of its appreciation is being driven by weakness in the U.S. dollar.

“If you’re proposing that there’s some council of intervention here, what are you going to do, try and influence the U.S. dollar? Give me a break,” he said.

Certainly, the markets continue to see Aussie economic strength that belies many of the underlying indicators. Underlying inflation measures favored by the RBA have held below the bottom of policy makers’ target range of 2 to 3 percent for six straight quarters, something that hasn’t happened this century. That hasn’t stopped swaps traders boosting bets on future cash-rate increases.

--With assistance from Michael Heath

To contact the reporter on this story: Garfield Reynolds in Sydney at greynolds1@bloomberg.net.

To contact the editors responsible for this story: Mark Cudmore at mcudmore8@bloomberg.net, Adam Haigh, Ravil Shirodkar