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Australian Dollar Rally Could Falter As RBA Holds Interest Rate Steady

Australian Dollar Rally Could Falter As RBA Holds Interest Rate Steady

2010-07-30 23:23:00
David Song, Currency Strategist
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TOF730aud_body_TOF730aud.gif, Australian Dollar Rally Could Falter As RBA Holds Interest Rate Steady

Australian Dollar Rally Could Falter As RBA Holds Interest Rate SteadyFundamental Outlook for US Dollar: Bearish

The Australian dollar strengthen against its U.S. counterpart for the second consecutive week as it continued to benefit from the rise in risk appetite, but the bullish sentiment supporting the high-yielding currency could taper off going into August as the central bank is widely expected to keep the benchmark interest rate on hold for the third time. A Bloomberg News survey shows all of the 23 economists polled forecast the RBA to maintain borrowing costs at 4.50% in August, while investors are pricing a zero percent chance for a 25bp rate hike according to Credit Suisse overnight index swaps as the central bank looks to assess the impact of higher borrowing costs on the recovery.

A report by the Australian Bureau of Statistics showed consumer prices increased 0.6% in the second quarter after expanding 0.9% during the first-three months of the year, while the headline reading for inflation advanced at an annualized pace of 3.1%, which fell short of expectations for a 3.4% rise in price growth. At the same time, Treasurer Wayne Swan said the cash rate is “back to normal” during an interview with the Australian Broadcasting Corporation, and sees price growth “moderating” going forward as the fiscal and monetary stimulus fades. As the central bank forecasts inflation to track “close to target” and expects to see an uneven recovery in the global economy, the RBA may see scope to maintain a wait-and-see approach throughout the second-half of the year as it aims to balance the risks for growth and inflation. As a result, comments following the rate decision could weigh on interest rate expectations and lead the Australian dollar to retrace the near-term advance, and push the exchange rate back below the 100-Day SMA at 0.8859 as price action continues to hold under 0.9100.

Nevertheless, the economic docket is expected to reinforce an improved outlook for future growth as market participants forecast retail spending to expand 0.7% in the second quarter following the 0.1% during the first-three months of the year, while the house price index is projected to increase another 2.0% during the same period after advancing 4.8% in the first quarter. With the rebound in economic activity gathering pace, the fundamental developments could generate speculation for another rate hike later this year. - DS

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