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AUD: What to Expect from the RBA

Last updated 2/1/2010 3:22 PM ET (GMT -5) 2 Comments

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Kathy Lien

Director of Currency Research, GFT

Over the past few weeks, the Australian dollar has fallen victim to the same pressures as the other high yielding currencies.  Risk aversion along with demand for U.S. dollars has pushed the AUD/USD below 90 cents.  However on the eve of the Reserve Bank of Australia’s monetary decision, currency traders are buying Aussies on the hope that the RBA will increase interest rates once again. A rate hike is pretty much a done deal and if the RBA fails to deliver, they stand the risk of triggering a very sharp sell-off in the Australian dollar.  Although this would be welcomed by the central bank because a weaker currency stimulates the economy - recent economic data including yesterday’s manufacturing PMI numbers suggest that the Australian economy does not need more stimulus.  In fact, growth is so robust that the RBA has been on a rampage to clamp down on asset bubbles.  Yet after 4 consecutive interest rate hikes, it may be time for the RBA to slow things down.  

After raising rates in December, central bank Deputy Governor Ric Battelino said that the “neutral” rate is no longer 5 percent and we estimate that it is probably closer to 4.5 percent.  Australian interest rates are currently at 3.75 percent.  If the RBA raises rates today by 25bp that would leave only 50bp of additional tightening before they get to 4.5 percent.  This is only the first monetary policy meeting of the year and the Chinese government’s active efforts to slow their economy could encourage the central bank to spread out their remaining rate hikes.  Therefore we believe that the RBA will raise interest rates by 25bp to 4 percent but set the market up for a possible pause in March.  Based upon the latest inflationary numbers, the RBA has the flexibility to slow things down.  Up until now, the central bank has said they will “lessen gradually the degree of monetary stimulus.”  Any hint of hesitation to raise rates the following month will temper the reaction in the Aussie which suggests that another rate hike may not be enough to turn the AUD/USD around.  In order for the Aussie to rise back above 90 cents, not only would the RBA need to raise interest rates, but they would also need to leave the door wide open for another rate hike in March.  

The following table lists the economic data that has been released since the December monetary policy meeting.  Central banks always look at how the economy has performed from meeting to meeting and so we compared the latest data with data that the RBA would have had in their hands in December.  As you can see, aside from a decline in inflationary pressures, the overall improvements in the Australian economy supports additional tightening.

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Comments (2)

jersoner

February 01, 2010 at 04:39 PM ET

I agree, there has been a steady climb all day with the aussie on predicted outcomes of tonight. I however am not on this banwagon if you will, and would love to jump on a short if it doesn't go to 4%.

fishmanszmit

February 02, 2010 at 05:30 PM ET

What does this do to the AUS/USD? I see it has climed to 88.65 +/-. I think FX360 suggested that this pair would drop to 85, or 87? Can you tell me what the outlook is for the AUS/USD at this point? Is this climb a reversal or just temporary due to the interest rate? Thank you.

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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.