Unexpected commentary from the Reserve Bank of Australia indicating a potentially more open mind to rate hikes and a falling greenback have combined to push the Aussie dollar to its highest level in more than two years.
The Australian dollar surpassed 79 US cents for the first time since May, 2015 after the RBA released its July board meeting minutes on Tuesday and at 1700 AEST was at 79.16 US cents, having retreated from a session high of 79.24 US cents.
In the minutes the central bank struck a more positive tone about the economy than Governor Philip Lowe had in his rates decision statement a few weeks ago, noting the fall in the unemployment rate to a four-year low of 5.5 per cent and improvements in business conditions.
The minutes also contained a surprise discussion of Australia's "neutral cash rate" - the theoretical point at which interest rates neither stimulate nor dampen economic growth - saying the rate was 3.5 per cent now, whereas the actual official cash rate is 1.5 per cent.
National Australia Bank chief markets economist Ivan Colhoun said the RBA's positive tone about the economy and remarks about the neutral cash rate contributed to the jump in the Aussie dollar.
He also cited a weak US dollar as a factor, with the greenback sliding against major currencies amid concerns about US President Donald Trump's failed healthcare reform bill.
"Given the RBA talked about that (the neutral cash rate) and other central banks are actually beginning to move rates up, that got the market thinking maybe the Reserve Bank is closer to moving interest rates up," he said.
St George Bank senior economist Janu Chan said the RBA discussion about the neutral cash rate suggested it was starting to lay the groundwork for the normalisation of monetary policy.
The cash rate has been at a record low of 1.5 per cent since August, 2016.
"While this is not suggesting a rate hike is around the corner, it does imply that the RBA is edging further away from thinking about another cut to the cash rate in this cycle," she said.
"The second point is that once the process of monetary policy normalisation is underway, the RBA views that the cash rate could lift up to two percentage points higher from the current level of 1.50 per cent."
