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Australian Dollar To Come Under Pressure as RBA Holds Cash Rate

Australian Dollar To Come Under Pressure as RBA Holds Cash Rate

2010-05-28 21:09:00
David Song, Currency Strategist
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TOF-10-05-28-AUD

Fundamental Outlook for US Dollar: Bearish

- Westpac Leading Indicator Rises Most in Four Months
- Private Capital Expenditure Expectedly Declines in First Quarter
- Equities, Commodities and Currency Markets Concede to Risk Aversion and Deleveraging

The Australian dollar rallied to a high of 0.8548 during the final full week of May following a rebound in risk sentiment however, the market moving event risks scheduled for the first week of June is likely to stoke increased volatility in the exchange rate as investors weigh the outlook for the $1T economy. The Reserve Bank of Australia is widely expected to maintain a neutral policy stance next month as the interest rate returns to “average” levels, and the central bank may adopt a wait-and-see approach going forward as policy makers assess the impact of its recent rate hikes.

A Bloomberg News survey shows all of the 22 economists polled forecast the RBA to hold the cash rate steady at 4.50% in June after rising borrowing costs six times during the last seven meeting, while investors are pricing a zero percent change to a rate hike according to Credit Suisse overnight index swaps as the board sees “monetary policy well placed for the present. Moreover, the central bank said that the board “spent considerable time discussing the disturbances in financial markets” sparked by the European debt crisis, and argued that a case “could be made for a pause in the process of normalizing interest rates owing to the uncertainties in the euro-area.” However, Governor Glenn Stevens maintained an improved outlook for growth and inflation and expects economic activity to “strengthen further over the next couple of years,” and the central bank may look to raise the cash rate further in the second-half of the year as the isle-nation continues to benefit from the expansion in China, Australia’s biggest trading partner.

Nevertheless, economic activity is forecasted to increase 0.6% in the first quarter following the 0.9% expansion during the last three-months of 2009, while company operating profits are projected to increase 3.0% during the same period, which would be the fastest pace of growth since the third-quarter of 2008. At the same time, business inventories are anticipated to rise for the third consecutive quarter, with market participants forecasting a 0.5% advance in stockpiles on unsold goods, and the rise in economic activity could benefit the Australian dollar as the outlook for future growth improves. - DS

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