Taking a look at the economic docket this past week, we have seen job growth maintain its positive trend, rising for the seventh time in the past eight months, while investment lending in March pared February’s decline. In the week ahead, the focus will turn to the consumer inflation expectations and the Westpac consumer confidence in May. However, speculators are more apprehensive with the RBA’s minutes as they are especially interested in the influence that recent economic activity will have on monetary policy going forward. Indeed, the Reserve Bank of Australia has raised its benchmark rate six times since October amid rising evidence that the economy will strengthen this year. However, the market is pricing in a cumulative 52 basis points worth of tightening over the next 12 months, and a two percent chance that they will raise rates at their June 1st meeting, according to the Credit Suisse Overnight index swaps.
Looking ahead, there is little chance that policy makers will grow even more hawkish and explore further tightening as the global economy is faced with the Euro
-zone’s debt crisis, despite European policy makers announcing a loan plan worth nearly $1 trillion. Recently, the central bank said that Australia needs to maintain fiscal tightening, and went onto say that they see recent signs of a rise in risk aversion globally. Additionally, Reserve Bank of Australia Assistant Governor Philip Lowe said that underlying strong demand from Asia will keep resource investment strong in Australia, and went onto add that he sees inflation coming down a bit further. Nonetheless, if the central bank adopts a neutral policy stance in the second half of the year, the currency may face increased selling pressure.
Also worth mentioning is the possibility that China may increase borrowing costs amid rising inflation. If China does raise their key overnight lending rate, this would lead to a reduction for the resources sector in Australia of which the economy thrives off of. Thus, it is possible that we could see a key pillar of support give away and lead the Aussie
to push lower against the buck as the currency has recently broken below the 200-day SMA, which has formed as a key level of support since May 2009. - MW