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Australian Dollar Rally May Continue if Risk Appetite Remains in Play

The Australian dollar dominated the FX markets over the past week after the Reserve Bank of Australia raised rates by 25 basis points to 3.50 percent, and went on to report that the economic would expand by 1.75 percent this year and 3.25 percent in 2010, compared to previous forecasts for expansions of 0.5 percent and 2.25 percent, respectively.

Australian Dollar Rally May Continue if Risk Appetite Remains in Play

Fundamental Forecast for Australian Dollar: Bearish

- Australian dollar falls despite RBA rate hike on shift in bias
- Aussie nonetheless outperforms, driven by strong risk sentiment
- Commodity prices can explain Australian Dollar rallies

The Australian dollar dominated the FX markets over the past week after the Reserve Bank of Australia raised rates by 25 basis points to 3.50 percent, and went on to report that the economic would expand by 1.75 percent this year and 3.25 percent in 2010, compared to previous forecasts for expansions of 0.5 percent and 2.25 percent, respectively. In light of this, Credit Suisse overnight index swap (OIS) rates are still pricing in 168 basis points worth of rate increases by the RBA over the next 12 months. Furthermore, OIS rates are pricing n a 64 percent chance of another 25 basis point increase on November 30. So long as risk appetite remains in play, these rate expectations bode well for Australian dollar strength.

Looking at this week’s headline event risk, the labor market report stands out the most. The release of the Australian employment change can often be like US non-farm payrolls: difficult to product and occasionally very market-moving. This could be the case on Wednesday evening as data is expected to show that Australia lost 10,000 jobs in October, which could push the unemployment rate up to 5.8 percent from 5.7 percent. Now, this would actually signal very little change from where the labor markets have been over the past few months, as the rate of joblessness first hit 5.8 percent in June. As a result, it will take a sharp decline in jobs to elicit a strong response from the Australian dollar, while a surprise increase could provide the currency with even more support.

DailyFX provides forex news on the economic reports and political events that influence the currency market.
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