Australian Dollar Poised to Test Yearly High on Rate Expectations

[B][B]Australian Dollar Poised to Test Yearly High on Rate Expectations[/B][/B]

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

The Australian dollar pared the decline following the Reserve Bank of Australia’s interest rate decision earlier this week, and rallied against the greenback for third day to cross back above the 20-Day moving average at 0.8344. At the same time, Credit Suisse overnight index swaps are up 183bp in September after climbing 191bp in the previous month, and the downturn in the interest rate outlook may keep the pair within a broad range over the following week as investors weigh the outlook for future policy. Meanwhile, Treasurer Wayne Swan continued to hold a caution tone at the G20 Summit in London, and expects global growth to remain “sluggish” going into the following year, as fears of a slower recovery may weigh on market sentiment, which could lead investors to curb their appetite for the higher yielding currency.

The RBA held the benchmark interest rate at the 49-year low of 3.00% for the fifth consecutive month in September, and the central bank is widely anticipated to hold a neutral policy stance throughout the second-half of the year as the board forecasts economic activity to expand at an annual rate of 0.5% this year. In addition, Governor Glenn Stevens said that the risks for inflation to hold below the 2-3 percent target range “looks low,” but went onto say that price pressures are likely “to moderate in the near term” following the weakness in global commodity prices. Moreover , the central bank stated that “the present accommodative setting of monetary policy remains appropriate for the time being” as they expect growth prospects “to firm going into 2010,” and the Australian dollar may continue to push high against its currently counter parts over the near-term as investors anticipate Governor Stevens to tight policy over the next 12 months. Credit Suisse OIS shows investors are pricing a 37% change for a rate hike at the next policy meeting in October, and the AUD/USD may continue to retrace the sell-off from the previous year as the economic outlook improves.

Meanwhile, the economic docket for the following week is likely to stoke increased volatility in the Australia cross rates as economists anticipate the labor market to weaken further. The $1T economy is expected to shed 15K jobs in August, with the jobless rate anticipated to reach a six-year high of 5.9%, and fading demands for employment may weigh on economic activity going forward as households continue to face tightening credit conditions paired with fears of a slower recovery. Nevertheless, retail spending is forecasted to rise 0.5% in July as the government commits more than A$20B in public hangouts to stimulate domestic demands, while home loans are expected to fall 1.0% during the same period as banks remain reluctant to lend, and the slew of data is likely to spark mixed reactions as the outlook for global growth remains weak. – DS