Currencies | Jun 06 2011
Australian Dollar To Be Heavily Influenced By RBA Rate Decision
By David Song, Currency Analyst
Fundamental Forecast for Australian Dollar: Neutral
The rebound in the Australian dollar certainly gathered pace coming into June, but the high-yielding currency may come under pressure in the following week as the Reserve Bank of Australia is widely expected to retain its current policy for the sixth consecutive meeting. As the RBA keeps the benchmark interest rate a 4.75% throughout the first-half of 2011, the central bank may see scope to retain its wait-and-see approach in the months ahead, and the near-term rally may come to a halt as currency traders scale back expectations for higher interest rates in the isle-nation.
The largest economic contraction in 20 years paired with the slowdown in global trade certainly dampens the outlook for future growth, and the central bank may continue to strike a balanced tone at the rate decision on June 7 as monetary policy remains “mildly restrictive.” At the same time, the RBA may continue to highlight the “significant divergences” across the region as households and businesses cope with the aftermath of the natural disasters from earlier this year, and currency traders are likely to show a bearish reaction to the rate decision should the central bank talk down speculation higher borrowing costs. Indeed, interest rate expectations have tapered off in June as Credit Suisse overnight index swaps now reflect a 25bp rise for the next 12-months, which compares with projections for 50bp worth of rate hikes back in May. As the near-term rally in the AUD/USD tapers off ahead of 1.0800, the pair may fail to retrace the sharp reversal from 1.1011, and the Australian dollar could have carved out a major top in the previous month as there appears to be a major shift in risk-taking behavior.
However, as the Australian economy is expected to add 25.0K jobs in May, the rebound in employment should help to prop up the local currency, and but there certainly remains a risk of seeing an unexpected contraction in hiring as businesses scale back on production. In turn, we may see the AUD/USD make another run at 1.0400 in the coming days, but the high-yielding currency may struggle to find psychological support if there is a considerable shift in risk sentiment. – DS
The views expressed are not FNArena's (see our disclaimer).
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