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RBA Hikes But Aussie Falls

Last updated 12/1/2009 2:02 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

The Reserve Bank of Australia produced an unprecedented third consecutive monthly rate hike of 25bp taking the benchmark rate to 3.75%, but the accompanying statement did not offer a clear timetable for further increases spurring some profit taking in the Aussie.

In the accompanying statement the RBA noted, “In Australia, the downturn was relatively mild, and measures of confidence and business conditions suggest that the economy is in a gradual recovery. The effects of the early stages of the fiscal stimulus on consumer demand are fading, but public infrastructure spending is starting to provide more impetus to demand. Prospects for ongoing expansion of private demand, including business investment, have been strengthening. There have been some early signs of an improvement in labor market conditions. The rate of unemployment is now likely to peak at a considerably lower level than earlier expected. “

The monetary officials however did not provide any clear guidance regarding further tightening in 2010, leading some market players to speculate that the RBA may pause until February before considering any additional  rate hikes. An announcement by local lender Westpac  to lift variable mortgage rates by 45 basis points was also seen as weighing on the market. Yesterday, Australian New home Sales declined by -6.0% versus -4.5% the month prior and we noted that the RBA hikes are clearly having a negative impact on the housing sector which could begin to weigh on consumer sentiment.

Attention will now turn to the Retail Sales number due tomorrow night at 1:30 GMT. The market is anticipating a rebound of 0.3% versus a decline of -0.2% the period prior, but if the data prints hotter than forecast it would serve as a strong testament to the fact that Australian consumer demand remains robust and   can absorb additional tightening measures by the RBA. 

The Aussie traded down to 9110 in the aftermath of the release in a classic buy the rumor sell the news dynamic, but if the fundamentals of the Australian economy continue to show steady expansion, the unit should resume its rally against the buck given the massive interest rate differentials between the two currencies.  The Aussie is the only liquid high yielder amongst the G-20 currencies and as such it should continue to attract carry trade flows if the environment for risk remains supportive.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.