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Australian Dollar Will Gauge Interest Rate Forecast ahead of RBA Meet

Australian Dollar Will Gauge Interest Rate Forecast ahead of RBA Meet

2010-03-27 03:07:00
John Kicklighter, Chief Currency Strategist
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At 4.00 percent, Australia’s benchmark lending rate is 150 basis points over its closest liquid counterpart (the New Zealand dollar). And, while a general rise in the demand for yield can lead the currency to further gains; the current differentials have long been priced into each exchange rate. In fact, there is considerable speculation for further tightening, and the differentials with the expectations of other central banks moving on their own policy.  This interest rate speculation is critical to the health of the Aussie dollar. Consider the fact that the unit’s already high exchange rate is already pricing in both the current level of the interest rate as well as the current forecast. To achieve further appreciation, the scenario has to further improve in Australia’s favor. As it stands, the 12-month forecast for rates is pricing in approximately 120 basis points of additional hikes. In comparison, the RBNZ is looking at 180 bps, the BoC 147 bps, the Fed 90 bps and ECB 67 bps. For historical perspective, the outlook for the Reserve Bank of Australia’s pace has not surpassed 140 bps for four months; while the market has been increasingly hawkish on other central banks. This is not unreasonable considering the Australian group has already lifted the rate four times while no other bank has moved since the crisis. With economists expecting the RBA to hold at the April 6th meeting, we could see the currency’s clout start to diminish as others play catch up.

In the meantime, scheduled data could have significant bearing on forecasts. The monthly TD inflation figures will have the most direct influence over the policy outlook; but the previous annual reading of 1.9 percent offers little hope of a sudden spike of price pressures. Private sector credit and building approval figures are perhaps the more influential numbers. A strong domestic base, sound credit markets and robust housing market have led the policy authority to its fight against burgeoning inflation fears. And, further rounding out the growth outlook, we have the heavy-hitting (and often market moving) releases of retail sales, manufacturing activity and the trade balance. - JK

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