Australian Dollar Could Topple if the RBA Doesn’t Keep Pace
When defining the fundamental strength of the single currency; it is fair to say that robust growth is the rudder and interest rates are the sails. Growth is no longer so disparate that the Aussie dollar can maintain a significant advantage – at least not one by traders’ standards as they are more short-term focused. The real climb comes with yield. A quick comparison shows the benchmark lending rate in the island country is already 4.25 percent for a considerable premium over its counterparts. However, the real impact is from expectations. Heading into this week’s rate decision, traders are haunted by Governor Glenn Steven’s remark not long ago that the current level of rates is “pretty close” to the normal that the group was targeting. Indeed, this past week’s inflation data showed price pressures are not yet out of line. Looking at economists’ forecasts, there is a heavy majority behind another 25 basis point hike; but the market is less sure. Overnight index swaps (from Credit Suisse) show a much more indecisive 55 percent probability. Should the central bank decide to hold rates, it would be considered a step towards a general shift in approach to policy that would lead to much more time between follow up hikes. If that is the case, it would open the door for other nations and currencies to catch up. This will likely prove so prominent a theme that it will likely overwhelm most trends in underlying risk appetite.
And, while we may be focusing on interest rates through the week, the rest of the calendar should not go overlooked. The docket is fully stocked with notable event risk. Before the central bank decision, proprietary inflation data will refine the argument of future price pressure. Aside from that, we will get a full view of economic activity. From the business sector, activity reports for the factory, service and construction sectors are all due. For the consumer, retail sales for March will round out the quarter. And, finally, the trade balance will offer a look at the ever vital Chinese export connection. - JK
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.