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RBA Rate Decision Could Break the Aussie

RBA Rate Decision Could Break the Aussie

2011-10-01 01:41:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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RBA Rate Decision Could Break the Aussie

Fundamental Forecast for Australian Dollar: Bearish

After posting modest gains at the start of the week, the Australian Dollar finished the week poorly, dropping by 1.20 percent against the U.S. Dollar. The Australian Dollar, as part of the commodity currency block, faced significant headwinds in the latter half of the week; however, this was widely expected, as global growth continues to show signs of weakness and the European sovereign debt situation has squeezed investors out of higher yielding and risky assets.

While the calendar is littered with data of medium significance or more, there is truly only one piece of information that matters this week: the Reserve Bank of Australia rate decision and accompanying statement by Governor Glenn Stevens. Markets have indeed priced this in; according to the Credit Suisse Overnight Index Swaps, there is a small 29.0 percent chance of a 25-basis point rate hike, although, 133-basis points are being priced out over the next 12-months. Thus, while a rate cut might not occur at this meeting, it should be expected sometime in the near-future.

While the Aussie made significant progress in July on rate hike speculation, that was quickly deflated when the Board offered a rather bleak outlook for global growth. Similarly, after the September 6 meeting, Governor Glenn Stevens noted that “conditions in global financial markets have been very unsettled over recent weeks….as a result, the outlook for the global economy is less clear than it was earlier in the year.” The Reserve Bank of Australia continued to say that growth was slowing. Governor Stevens’ statement included a note that some “temporary impediments” to growth, such as the supply-chain disruptions from the Japanese earthquake as well as higher commodity prices, were “lessening.”

Given these observations, it appears that the Reserve Bank of Australia is becoming increasingly dovish. While concerns over the Australian economy are limited in scope, any pullback in Australian growth is likely to be provoked by broader global macroeconomic trends. This has translated into a weaker Australian Dollar over the third quarter of 2011. If further dovish rhetoric is issued - as expected – interest rate expectations could diminish further. Indeed, a lack of supportive commentary could send the Aussie plummeting in the coming days and weeks. – CV

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