Australian Dollar May Strengthen as RBA Sees Scope For Higher Rates

Australian Dollar May Strengthen as RBA Sees Scope For Higher Rates

[B]Fundamental Outlook for Australian Dollar: Bullish[/B]

The Australian dollar rose to a fresh yearly high against the greenback following the hawkish comments from RBA Governor Glenn Stevens, and the high-yielding currency may continue to appreciate against its major counterparts over the following week as investors anticipate the central bank to tighten policy over the next 12 months. Credit Suisse overnight index swaps are up nearly 185bp in August as market participants speculate the central bank to raise borrowing costs toward the end of the year, and the improved outlook held by the central bank head is likely to reinforce expectations for a rate hike as policymakers anticipate economic activity to expand 0.5% this year.

During the semi-annual testimony, Mr. Stevens held an improved outlook for $1T economy and curbed expectations for further easing as policymakers see no need for another round of government stimulus. The central bank Governor said inflation expectations remain well-anchored, while Australia’s terms of trade remained strong, and expects the jobless rate to hold below 8.5% as businesses continue to shorten working hours rather than scaling back on employment. Moreover, Mr. Stevens stated that the interest rate will have to rise from the ‘emergency level’ as the outlook for growth and inflation improves, and went onto say that the RBA may begin to hike rates ahead of its counterparts as market participants continue to price-in higher borrowing costs. However, Governor Stevens noted that the economy may contract over the next two-quarters as he sees a risk for household spending to falter, and concluded that the central bank will maintain its current policy for the time being in an effort to support a sustainable recovery. Nevertheless, as the economic calendar for the following week remains fairly light, the AUD/USD may continue to retrace the sell-off from the previous year as market sentiment improves, and may extend the rally from the March low as investors raise their appetite for risk. - DS