FYI | Oct 23 2006
By Chris Shaw
On Wednesday the latest inflation data for the Australian economy is released, with the ANZ Bank expecting it will show enough upward pressure on the core inflation rate to justify a further increase in interest rates by the end of the year and more likely on November 8th, when the Reserve Bank of Australia (RBA) next announces its cash rate.
This should be a positive for the local currency in the bank’s view, as it notes foreign exchange market trading late last week was centred on interest rate differentials. This means the Aussie dollar can be expected to gain further support if the inflation data is suggestive of the need for a further rate increase.
The bank notes the Aussie dollar had trouble holding above US$0.76 against the greenback last week, but suggests any dips to levels of around US$0.7560 are likely to be well supported in the market given the interest rate outlook, particularly as the US Federal Reserve is expected to keep US interest rates on hold when it meets this week.
The Aussie dollar is also tipped to strengthen further against the yen as last week it managed to break through the 90 yen level, which has been acting as significant resistance. The bank points to the yen’s inability to maintain its strength after breaking through 118 against the US dollar last week as further reason why the Aussie is benefiting on the cross rates, as the failed move is causing traders to cover their short positions.
Also helping is the ongoing differential in rates, as the Bank of Japan is not expected to increase official interest rates in Japan prior to the new year, meaning the Australian dollar should enjoy an inflow of buying support if rates go up in coming weeks.