The AUD has managed to remain at decent in the last few months, despite the decline in key commodity prices like steam and met coal and iron ore.
It is not unusual for commodity prices and the AUD to move in different directions over relatively short periods. But it does seem like that the AUD will move back into the 85-90cent range in the next 3 or so months.
The key wedge between commodities and the AUD the last few months has been an improvement in growth that is now flowing through to stronger employment and a somewhat lower unemployment rate. That has seen most forecasters and markets abandon expectations for further rate cuts from the RBA, will a growing number of analysts calling for hikes this year.
There are signs, however, that momentum in the non-mining parts of the economy will slow. In particular, it does appear that we are now past the point of maximum impulse from the cut in interest rates we saw over 2013.
For example, new home loans are still at a high level, but are no longer accelerating as they did in 2H13. This is already starting to take the edge off house prices in some areas.
And while the impulse from monetary policy is fading, fiscal policy is becoming contractionary, with the reduction in the deficit a little over 1% off GDP. Consumer confidence has also been impacted heavily over the past month or so.
In a traditional cycle, this wouldn't be such a big problem, as some of the lagging sectors of the economy would pick up the slack. But this isn't a normal cycle for Australia, thanks to the long boom in mining investment that is coming to an end.
It has probably taken longer than expected for Australia to fall over the "capex cliff". At the moment, investment expectations for 2014-15 look dreadfully low, although outcomes in the last few quarters have probably held up a bit better than previously thought.
It seems unlikely that the AUD will remain strong if key drivers of the recent recovery like housing start to cool and investment rolls over. That may bring speculation of rate cuts back in play.
