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Australian Dollar Direction Unclear Between Price Pressures, RBA’s Tone

Australian Dollar Direction Unclear Between Price Pressures, RBA’s Tone

2011-02-19 04:43:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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Australian_Dollar_Direction_Unclear_Between_Price_Pressures_body_Picture_4.png, Australian Dollar Direction Unclear Between Price Pressures, RBA’s Tone

Australian Dollar Direction Unclear Between Price Pressures, RBA’s Tone

Fundamental Forecast for Australian Dollar: Neutral

The Australian dollar rebounded from its decline last week, gaining 1.18 percent against the U.S. dollar in trading this week. The AUD/USD pair pushed as high as 1.0157 on Friday, though the gains may be short-lived. The exchange rate could retrace its gains in the week ahead as interest rate expectations falter for Australia and rally for the United States. As the most recent rally failed to push the AUD/USD pair above the psychologically significant 1.0200 level, the reversal in the exchange rate should gather pace going forward, as dovish sentiment from the Reserve Bank of Australia lingers despite a senior official offering a contrarian stance earlier this week.

On Wednesday, RBA Assistant Governor Phillip Lowe noted that “significant downside risk” to the global economy remains, while at the same time offered hawkish rhetoric. He went on to discuss rising price pressures in commodity markets and how they might impact Asian economies, saying, “If these inflationary pressures were to intensify, a stronger policy response than seen to date would be likely, increasing the risk of a subsequent sharp slowdown in the region.” Rising inflationary pressures are becoming an increasing concern for central banks in Asia, with the People’s Bank of China confirming this sentiment by raising the reserve-requirement-ratio early in Friday’s session. According to Credit Suisse Overnight index swaps, investors are now pricing a 25bp rate hike for the next 12 months amid earlier projects for a 50bp rise in the cash rate, and the downturn in interest rate expectations may continue to bear down on the exchange rate as market participants weigh the prospects for future policy.

As the AUD/USD movesabove parity after falling below it for the first time in nearly two-weeks, a retracement could be expected back below its 20-SMA of 1.0052, though to remain above its 100-SMA of 0.9935. A clear break below its 100-SMA exposes the yearly low of 0.9803 as the next level of significant support. However, as commodity prices move higher in line with increased risk trends, further inflating prices could boost interest rate expectations for the already higher-yielding currency, pushing the AUD/USD pair above its 2011 high of 1.0228. -CV

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