Forex Market Pulse: Tracing RBA Rate Hike and AUD Upside

By world market pulse team on November 03,2010

As the world markets including the currency markets eagerly await the Fed's decision on further quantitative easing, the Australia’s central bank unexpectedly raised interest rates yesterday fueling optimism in the global economic recovery. As a result the Australian dollar traded at its highest levels against the US dollar since 1982.

The RBA rate hike and hawkish statement gives some further upside potential for the AUD. Indeed, the RBA hiked by 25bps to 4.75%, which is consistent with the continued strong domestic data coming from Australia. RBA governor Stevens gave the impression that this hike is pre-emptive with modest inflation trends probably about to end.

Meanwhile analysts at BNP Paribas feel that AUD will stay supported from the positive readings of Chinese data. The AUD has been correlated to the Chinese PMI, which has rebounded strongly over the past couple of months, and analysts maintain their bullish AUD positions looking for AUDUSD to sustain a move above parity targeting the 1.02 area. BNP Paribas experts also expect AUDNZD to continue to push higher.

AUDUSD Outlook

AUDUSD gained over a full cent to trade just under parity after the RBA surprised by delivering a 25 bps rate hike to 4.75%. In explanation for the hike, the RBA cited tight labor markets, a likely end to the recent moderation in inflation and, in an echo of Governor Stevens' comments from last month, the large expansionary shock from the high terms of trade. It also said that fears of a larger than expected slowing in Chinese growth have lessened recently.

Yesterday’s rate increases by the Australian and Indian central banks have served to highlight the fact that the Fed is now the only major central bank looking at further easing in the short-term.

Analysts at BNP Paribas have however questioned whether the move will have legs ahead of FOMC's final decision, as Investors are unlikely to add further to AUD risk. Fearing that Fed's decision may just run RBA hike out of steam, as another test of parity analysts expect AUD to struggle to break much beyond the previous highs of 1.0003 – at least until FOMC is out of the way.

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World Market Pulse Forex Update: Measured QE2 And Beyond

By world market pulse team on October 28,2010

Most of the world currency markets is brimming with activity as speculation over QE2, G20, capital controls and inflation continues to be in the limelight today with the BOE and the FED grabbing most attention. Meanwhile Asian news suggesting currency reserves are also on the rise with the EU Head of State meeting where the German Chancellor is expected taking a non-compromising position while the BOJ bringing its policy meeting forward. Markets are generally softer, with the USD biased for strength.

There is also a market sentiment suggesting that China and the US are close to an agreement on current account imbalances pushing markets to curtail their expectation for QE2 as forex experts feel that the logic being that a softening in China’s stance would ease pressure on the US to implement QE2. Analysts at BNP Paribas meanwhile expect USD range trading today, but with US bonds yields staying bid for now USDJPY and EURJPY should rally, while EURUSD’s upside should be limited by 1.3920. GBPUSD remains a clear sell near 1.5800 after Posen's suggesting that QE might come too late and might be not enough.

EUR-USD: The EUR has weakened since yesterdays close, but is still trading within its three-week 1.3698 to 1.4159 range. A break of this range should foreshadow the next move. Today the focus is on the USD rally driven by scaled back expectations of QE. Analysts at Scotia Capital have suggested that this will prove temporary and that the EUR will still face upward pressure into year-end on the back of a weak USD. However, for now the risk is that the market is extremely short the USD and shift in sentiment could see downside pressure on EUR as position squaring takes over.



USD- CAD: CAD is under performing today, having lost 0.4% against the USD and 0.2% against EUR. USDCAD is within a hundred points of the clustering of its 50, 100 and 200-day moving averages (1.0314, 1.0345 and 1.0344, respectively) and the year-to-date average trading level of 1.0345. All in all, USDCAD remains firmly within its year-to-date range, unable to break decidedly on either side of it. The main driver of USDCAD continues to be QE in the US and the odds of a currency agreement. With the PBoC hiking rates ahead of key data releases on Thursday, these odds improved. This thematic has already taken over. USDCAD around 1.0350 continues to offer opportunities to go short.


Asian Currencies: Asian currencies have come in firmer dragging G-10 currencies against the USD with it. Korea doubling its current account surplus from August to September and China allowing USDRMB to fix higher for the 4th consecutive day will bring the theme of Asian currency reserves and the related allocation issues back to the market. Meanwhile, the Bank of Japan is expected to downgrade its forecasts for the country's economic growth and prices at its policy meeting today amid signs that the return of the economy to a path of sustainable expansion will be delayed due to deflation.

AUD-USD: AUD is under performing having lost 1.3% against the USD and 1.1% against EUR. A softer than expected CPI release (coming in at 0.7% q/q and 2.8% y/y) has dampened the expectations for further interest rate increases and weighed on AUD. In some ways, the CPI release has simply offset the positive impact the currency and interest rate outlook received with the above consensus PPI release earlier this week. Governor Stevens recently indicated that monetary policy would have to take into account one off shocks to terms of trade on inflation over and above the regular cyclical factors.

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