The Australian dollar was easily the strongest performer last week, gaining over 4 percent against both the greenback and Japanese yen, after the Reserve Bank of Australia surprised everyone and became the first major central bank to raise interest rates after the global financial meltdown.
[B]
Australian Dollar May Simply Consolidate After RBA-Induced Rally[/B]
[B]Fundamental Forecast for Australian Dollar: Neutral[/B]
- The Reserve Bank of Australian surprised everyone and hiked rates by 25bps to 3.25%
- Australian employment unexpectedly rose by 40,600 in September
The Australian dollar was easily the strongest performer last week, gaining over 4 percent against both the greenback and Japanese yen, after the Reserve Bank of Australia surprised everyone and became the first major central bank to raise interest rates after the global financial meltdown. Indeed, the RBA raised rates by 25 basis points to 3.25 percent, as the central bank determined that “growth [is] likely to be close to trend over the year ahead [and] inflation close to target,” adding that “the risk of serious economic contraction in Australia [has] passed.” Meanwhile, RBA Governor Stevens said that “it is now prudent to begin gradually lessening the stimulus provided by monetary policy,” suggesting more rate hikes may follow, with Credit Suisse overnight index swaps now pricing in another 175 basis points worth of increases over the next 12 months.
In being the first to take this bold step, the RBA has upped the ante for other central banks, but more specifically, the Reserve Bank of New Zealand, the European Central Bank, and the Bank of Canada, as the markets are speculating that they may be the next to follow suit. That said, with increased speculation comes increased disappointment when the central bank strikes a neutral tone, as we saw with the euro’s response to the ECB’s statement last week.
Event risk will be comparatively low for the Australian dollar this coming week, and as a result, price action may simply constitute a consolidation period for the currency following its massive rally. The releases of NAB business confidence and Westpac consumer confidence are likely to reflect robust optimism, as the sharp increase in employment suggests firms are doing well enough to hire and more households are earning income. Likewise, consumer inflation expectations could continue to creep higher, adding to evidence that the RBA will increase rates further.