The Australian dollar's climb above 72 US cents is being driven by a single factor in markets, according to Montgomery Investment Management chief investment officer Roger Montgomery: the Reserve Bank of Australia has emerged as the most hawkish central bank in the developed world, and global money is positioning for that gap to widen.
Speaking to ABC's The Business, Montgomery framed the move as a relative-yield trade rather than a story about Australian fundamentals.
"It's actually one of the top performing G20 currencies at the moment, and it's all because of the hawkishness of the RBA," Montgomery said. "The RBA's been lifting rates despite the fact that many other Western nations have not, not for some years, and so a lot of money is betting on further rate rises by the RBA which raises the relative return of the Australian dollar versus other currencies."
Montgomery was careful to put the call in the market's mouth rather than the RBA's. The question, he said, is not whether RBA governor Michele Bullock has signalled more hikes are coming. It is whether traders believe Australia has further to travel than the United States, the eurozone or the United Kingdom — and right now they do.
"The market is, may or may not get it right, but at the moment, the market moves are telling you that investors believe that the RBA is going to stand head and shoulders above everyone else in terms of rate rises," he said.
Asked whether several more hikes were on the table this year, Montgomery did not rule it out. The wildcard, he said, is fiscal policy and supply-side inflation flowing through from energy markets.
"It's certainly possible, but again, it depends on the next federal budget. It really does depend on how much money is being handed out, and it also depends on the extent to which supply chains are affected by the rise in the oil price that we've already seen."
"The consensus view is that even after the Strait of Hormuz is reopened, we could see persistent oil prices above $90 a barrel," he said. "It's unlikely, and I don't think many people are expecting the oil price to drop back to that 55 to 75 or $80 a barrel that we saw prior to the conflict."
Montgomery also used the interview to push back on the narrative that the local share market is simply being held back by a lack of large technology companies. The structural drag, he argued, is built into Australia's tax system rather than its sector mix.
"The Australian market's big problem is a long-term problem, and it's got nothing to do with technology companies. It's the fact that our tax system results in franking credits that have no value to Australian companies, which incentivises them to pay out the majority of their earnings as dividends," Montgomery said. "If they're paying out 80% of their earnings as a dividend, they're only retaining 20% for growth. In the United States, we see the reverse. The majority of profits are retained for growth. So over the long run we see better returns in terms of capital appreciation from the US market than we have from the Australian market."
The ASX 200 is currently sitting around 3% below its all-time highs while the S&P 500 has notched a record run, and Montgomery pointed to recent earnings reactions in ANZ and Macquarie Group as a sign US-style valuation nerves are now bleeding into local price action.
"I think one of the big issues is there's nervousness around valuations, particularly in the United States, and there's uncertainty about what Donald Trump will do next, and so often you find at the end of the week investors just don't want to end the week long stocks that they're not 100% convinced about, and so we see some pullbacks," he said.
He stopped short of calling a top, noting his fund does not time markets, but added a warning about the shape of US tech leadership.
"When markets go hyper hyper exponential, so they head vertical, that's usually unsustainable, and so some sort of a setback or a pause is typical. I wouldn't think that this chapter is going to be any different," Montgomery said.