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RBA Raises Inflation Forecast as Traders Raise Rate Expectations

RBA Raises Inflation Forecast as Traders Raise Rate Expectations

2011-05-06 23:07:00
Michael Boutros, Technical Strategist
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The Australian Dollar AU$

AUD/USD NY Spot Close 1.0689

RBA_Raises_Inflation_Forecast_as_Traders_Raise_Rate_Expectations_body_audusd.png, RBA Raises Inflation Forecast as Traders Raise Rate Expectations

Australian Dollar Rally To Accelerate On Higher Growth, RBA To Hold

Fundamental Forecast for Australian Dollar: Bullish

The Reserve Bank of Australia held rates at 4.75% for a fifth straight meeting as expected this week, noting that record highs in the Aussie will help contain rising inflationary pressures until late this year. Subsequently, traders began to discount further rate hikes in the months to come and the Aussie eased off of record post-float highs just above the 1.10-handel.

However, in its quarterly monetary policy statement released overnight, the RBA lifted its inflation forecast for the next two years noting, “Further tightening of monetary policy is likely to be required at some point for inflation to remain consistent with the 2-3% medium term target.” The RBA now sees inflation hitting 3% by December, a year earlier than forecasted. The 2013 forecast was pushed even higher at 3.25%.

The comments lifted the Aussie overnight, with the gains accelerating early in US trade after NFP data surprised investors with the addition of 244k jobs last month, besting calls for a print of just 185k. However, half-way through the trading session alarming rumors began circulating about the possibility of Greece exiting the euro. Traders were rattled by the news and risk appetite quickly subsided with equities surrendering half the day’s gains, while the aussie pulled back off session highs.

With the RBA raising its inflation forecast above the 2-3% target through 2013, the central bank may have little room to tolerate further price advances. Therefore, it’s becoming more likely that the RBA will lift its cash rate in August, as expected surges in mining and energy investment may accelerate the pace of inflation. Next week’s employment report will be crucial after last month saw a jump to the highest level of employment since 2004. An unexpected drop in the unemployment rate may hasten the central bank’s decision to tighten.

Looking ahead, the aussie will be subject to shifts in the interest rate outlook with the Australian Federal Budget and employment figures on the economic docket. The pair saw strong support at the 1.0570 support level, pairing nearly all of the losses seen on Thursday. Targets for the AUD/USD are eyed at 1.0770 followed by the 1.08-handle and 1.0870. A breech of 1.0920 would make way for a re-test of this week’s highs just above the 1.10- figure. Interim support rests lower at 1.0680, backed by 1.0650 and 1.0575. A break here would dispel further topside momentum, with subsequent floors eyed at the 38.2% Fibonacci retracement taken from the March 16th rally at 1.0510. We note that our contrarian Speculative Sentiment Index shows trading crowds reducing their net short, with roughly 2 traders short the Aussie against the dollar for every 1 trader who is long. -MB

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