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Aussie Looks Towards RBA Minutes for Direction in Light Conditions

Aussie Looks Towards RBA Minutes for Direction in Light Conditions

2011-12-16 23:50:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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Aussie_Looks_Towards_RBA_Minutes_for_Direction_in_Light_Conditions_body_Picture_5.png, Aussie Looks Towards RBA Minutes for Direction in Light ConditionsAussie_Looks_Towards_RBA_Minutes_for_Direction_in_Light_Conditions_body_Picture_6.png, Aussie Looks Towards RBA Minutes for Direction in Light Conditions

Fundamental Forecast for Australian Dollar: Bearish

The Australian Dollar was the second worst major against the U.S. Dollar – only the Euro was weaker – falling 2.28 percent over the past week. Overall, global financial markets were not given much reason to bid the Aussie higher – another disappointing Euro-zone summit, a rate cut by the Reserve Bank of Australia the previous week, and the looming threat of a wave of Euro-zone sovereign downgrades – and the AUD/USD settled the week under parity, at 0.9966.

Not much data is due over the coming week that could offer renewed appeal to the Australian Dollar. In fact, the most important piece of data on the docket, the RBA’s Board meeting minutes, offer a bleak outlook. At its December meeting, the RBA cut its key interest rate by 25.0-basis points for the second consecutive month; the overnight benchmark now sits at 4.25 percent from 4.75 percent in early November. Deteriorating global credit conditions have hurt the Australian Dollar in recent weeks, as banks try to short up capital in light of a looming Euro-zone disintegration as well as stricter Basel III requirements. This, coupled with weaker growth data out of China, has weighed on the Aussie; Australia is to China as Canada is to the United States (in Australia’s case, they ship precious metals to China whereas Canada ships oil to the United States). The RBA’s Board meeting minutes is likely to be a bearish event for the AUD/USD.

It is worth going over global funding concerns again, particularly in Europe. The Euribor-OIS 3-month spread, the rate at which Euro-zone banks lend unsecured funds to one another, is pushing highs unseen since 2009; in terms of the trend, the last time the Euribor-OIS 3-month spread was on the rise and was this elevated was the week after Lehman Brothers collapsed in September 2008. As a speculative investment vehicle – the Aussie offers a considerably higher yield than the other major currencies – it has and will face pressure as demand for liquid assets – mainly the U.S. Dollar – surge. –CV

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