RBA Hikes Interest Rates by 25bp, More to Come

Last updated 11/2/2009 10:57 PM ET (GMT -5) 13 Comments

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Kathy Lien

Director of Currency Research, GFT

For the second month in a row, the Reserve Bank of Australia has raised overnight interest rates. In the classic buy the rumor, sell the news type of reaction, the Australian dollar has given back some of its earlier gains.

Part of the reason why the Aussie sold off after the release is because the RBA said the recent appreciation of the exchange rate "is likely to constrain output in the tradeables sector and dampen price pressures." In other words, the want to add some two way action in the Aussie by letting the market know that they are keeping a close eye on their currency. However the RBA still believes that growth will be close to trend and inflation will rise in the coming year. In terms of growth, the RBA is happy with the initial improvements in the labor market and with the risk of a serious economic contraction off the table, policy makers are focused on taking interest rates back to neutral levels.

Despite the dip in the Aussie, it is important to remember that the quarter point move takes the official Australian yield up to 3.5 percent, securing the Australian dollar's spot as one of the highest yielding G20 currencies. Last month, the RBA became the first central bank in the G20 to start raising interest rates and to this day, they remain the most hawkish G20 central bank. Having just raised growth forecasts, the positive tone of the RBA statement is the central bank's way of expressing their vote of confidence towards the Australian economy. Despite criticism from Australians, the RBA does not believe that their rate hikes will undermine the recovery. Once again, the central bank cites growth in China as one of the primary reasons for the strength of the Australian economy which suggests that where China goes, Australia goes as well. The labor market continues to improve as evidenced by the latest job growth which should help to spur consumer spending. With Australian house prices continuing to rise strongly and the economy running on all cylinders, the RBA has no choice but to continue to raise interest rates.

More specifically,the monetary policy statement indicates that the central bank intends to continue to "gradually lessen the stimulus provided by monetary policy." We expect back to back quarter point rate hikes over the next few months. Interest rates are still at emergency levels and it will take another 75 to 100bp of tightening before rates return to neutral levels. This provides a great deal of opportunity in the Australian dollar, particularly against the currencies of countries whose central banks are not nearly as hawkish as the RBA. The Federal Reserve for example has been very passive at a time when the RBA is very hawkish which should help to fuel further gains in the AUD/USD ovem the medium term. Last month, the Reserve Bank of New Zealand made it crystal clear that they have no plans to raise interest rates until the middle of next year. This divergence with the RBA should also cause the New Zealand dollar to continue to underperform the Aussie.

Comments (13)

FXDragon

November 03, 2009 at 01:45 AM ET

Hello Kathy,
What would happen if rba did not raise int. rates? Why do they have to raise? Also, as new zealand is also a commodity country, it would grow with australia and china, i would think. Why are they decoupling?

Regards,

bschlossberg

November 03, 2009 at 03:03 AM ET

New Zealand exports soft commodities which are much more sensitive to exchange rate costs that why they are much more reluctant to raise rates and push kiwi higher

FXDragon

November 03, 2009 at 04:14 AM ET

Could you name soft and hard commodities please?

Thanks,

bschlossberg

November 03, 2009 at 05:52 AM ET

Metals are hard and wheats and agricultural commodities are soft

FXDragon

November 03, 2009 at 06:42 AM ET

Is oil soft or hard?

bschlossberg

November 03, 2009 at 07:21 AM ET

Neither it is part of the energy complex

rmsuleman

November 03, 2009 at 02:35 AM ET

K, please elaborate more on the term "Interest rates are at emergency level" - what do you mean by that and how do you define emergency level? Thanks

bschlossberg

November 03, 2009 at 03:09 AM ET

That's a term used by RBA. They consider 3% emergency level because that was at multi year lows.

Doobp

November 03, 2009 at 03:18 AM ET

buy on rumours, sold on news. sad. i bought on rumours but didnt sell.. sad.

boris, do you think this latest rate hike will have little to help rally the aussie again?from 4 hours candle chart, a reversal may happen.

koolraul

November 03, 2009 at 09:22 AM ET

AUD/USD sold off five minutes before the release which indicated a sell off on the release.

bschlossberg

November 03, 2009 at 03:33 AM ET

I have no idea.We generally do not make direct calls. The Aussie should rally if risk appetite returns later in the day but that's hard to forecast now.

hsbc

November 03, 2009 at 04:33 AM ET

getting really tough to trade towards yr end

Doobp

November 04, 2009 at 01:31 AM ET

I agree. It's very hard to forecast now. I rmb kathy once wrote an article on september setting the tone for the Q4.

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.