The Australian Dollar broke out of the downward trending channel from the January high (0.9331) as the economic docket reinforced an improved outlook for the region, and we may see the exchange rate hold a broad range over the following week as investors weigh the outlook for future policy. The Reserve Bank of Australia is scheduled to release its minutes from the policy meeting earlier this month, and the central bank is likely to maintain a neutral stance over the coming months following the record pace of rate hikes during the fourth-quarter of 2009.
However, Governor Glenn Stevens continued to reiterate interest rates are “likely” to rise further in the quarterly monetary policy statement, and said the improved forecast held by the board includes a “technical assumption” that borrowing costs will climb to 4.50% this year, which is largely in-line with market expectations. At the same time, the central bank noted that the money market yields reflect expectations for “further tightening, though at a slightly slower pace,” but went onto say that the core rate of inflation is projected to fall back to an annualized rate of 2.5% this year as the “effects of the temporary stimulus fade.” As a result, dovish comments from the RBA could weigh on the exchange rate as the central bank looks to adopt a wait-and-see approach, but improving fundamentals could boost demands for the higher-yielding currency as Governor Stevens aims to normalize policy throughout the year.
Nevertheless, as risk sentiment continues to dictate price action in the currency market, a rebound in the equities market could stoke a rise in risk appetite, which would certainly benefit the Australian dollar. However, the People’s Bank of China raised the reserve requirement for the second-time this month as it aims to temper the marked expansion in the region, and speculation for further tightening by the Chinese central bank could weigh on the outlook for future growth as the world’s third largest economy leads the global recovery. - DS
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