Australian Dollar Remains Supported By Interest Rate Expectations

The Australian dollar set a fresh yearly high of 0.8778 against the greenback during the past week before the release of the RBA minutes tempered interest rate expectations. Policy makers stated that “members were conscious of the need to balance the task of controlling inflation over the medium term with that of supporting economic recovery.”

Australian Dollar Remains Supported By Interest Rate Expectations

Fundamental Outlook for Australian Dollar: Bullish

-    Second quarter dwelling starts unexpectedly fall by 3.7%.

-    RBA Minutes Temper Tightening Expectations

-    The Westpac Leading Index rose by 1.1%, to its highest level in seven months

The Australian dollar set a fresh yearly high of 0.8778 against the greenback during the past week before the release of the RBA minutes tempered interest rate expectations. Policy makers stated that “members were conscious of the need to balance the task of controlling inflation over the medium term with that of supporting economic recovery.” The central bank is widely expected to be the first of the major economies to begin tightening making the already high yielder more attractive in the current environment of risk appetite. Indeed, the Australian economy emerged from the recent downturn with the least amount of scars and is poised to take advantage of global growth and the ensuing demand for raw materials. The Westpac leading index which is a gauge that attempts to forecast the economy’s performance over the next three to nine months rose by 1.1% to its highest level in seven months. Looking at the breakdown we see the bullish outlook is derived from expected positive contributions from real money supply and dwelling approvals which would suffer if the central bank started to cut rates. Furthermore, the second quarter dwelling starts report showed an unexpected decline of 3.7% against economists forecast of a 2.0% gain. It would mark the fourth straight quarterly decline and a clear signal that higher interest rates could start to increase downside risks.

Nevertheless, the central bank stated that the Australian financial system remains strong and that the country is benefitting from exposure to China and the global economy on a sustained growth path. However, Governor Stevens recognized that there are still some warnings signs such as weak business credit conditions. Therefore, we may see policy makers reluctant to take any actions that may deter lending following the recent credit crisis until inflation risks become obvious. Markets are still pricing in 174 bps of rate hikes over the next twelve months which should keep the Aussie well supported. Yet, we have seen it slip from a high of 199 bps on September 7th, which may signal some near-term weakness for the currency. The DEWR skilled vacancies report is due for release and softness in the labor market could give traders an excuse to take profits, but another sign of growth could add to bullish momentum. The RBA financial stability review and quarterly wage agreements are also on the horizon and could potentially impact price action. However, traders should take their cues from commodity markets and risk trends as they continue to be the dominant drivers of price action for the pair. The next level of resistance may be found at 0.8816-the 8/22/08 high where we could see the current rally stall. Conversely, we could see the pair retrace back to the 20-Day SMA at 0.8513 before another push higher. -