Australian dollar flat after dovish Fed signals

The Australian dollar ended little changed in Asia today after a session of trading that saw it washed both higher and lower.

The Australian dollar ended little changed in Asia today after a session of trading that saw it washed both higher and lower.

Dovish signals from the US Federal Reserve overnight were the biggest influence on the day.

Federal Reserve officials meeting in late April doubted they would be ready to raise short-term interest rates by midyear, according to minutes of the meeting released overnight.

The Fed indicated that, like many, it was trying to make sense of a first-quarter economic slowdown in the world’s biggest economy. Many at the April 28-29 policy meeting believed temporary factors were holding the economy back.

The commentary weakened the US dollar, giving the Aussie dollar a boost back above US79c in early trading.

At 5pm (AEST), the Australian dollar was trading at US79c, compared with US78.93c at the same time yesterday.

A rise in the iron ore price also helped the Aussie dollar. Iron ore prices have collapsed over the last year, slowing growth in Australia.

Still, a late bout of profit-taking trimmed the gains, leaving the currency little changed on the day.

Earlier this week, the Reserve Bank of Australia affirmed that interest rates were more likely to fall than rise over time.

Minutes of its May 5 policy meeting said it still had scope to lower interest rates if the economy needs a jolt. Those comments have seen the Aussie dollar fall from US80.50c at the start of the week.

Futures markets are currently pricing in a 68 per cent chance of a further rate cut by February next year.

Data next week on investment intentions will be critical for markets. The RBA has made clear it will need to see higher rates of investment to be confident the economy is on a solid growth trajectory.

The economy was boosted over the last decade by a record breaking investment, but that spur to growth has now faded. All eyes are on non-mining industries such as tourism, health, education, retail and manufacturing to help drive the economy.

Annette Beacher, head of research at TD Securities in Singapore, says the Aussie economy can grow by 3 per cent in 2016, but more investment is needed in the non-mining areas. First-quarter business investment data next week will be telling.

Ms Beacher says mining investment is expected to slump by around 20 per cent this year and next, so the task for non-mining is substantial.

“While manufacturing remains a media favourite, it accounts for 5 per cent of business investment. So yet again, all eyes are on services investment intentions to do the heavy lifting,” she said.