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Home » Online Forex Trading Blog » Australian Dollar: Australia Moves First

Australian Dollar: Australia Moves First

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Making the first move by a G-7 central bank, policy heads of the Reserve Bank of Australia moved ahead and increased the overnight cash rate by 25 basis points to 3.25 percent.  The move is significant, as it not only brings the rate above the 49-year low set since the beginning of the year, but it may have jumpstarted a new market trend.  Over the past two quarters, economic numbers have been on the mend for the Pacific country, as have the economies around the world.  Now central banks may begin to take firm stances against any nascent inflationary pressures that may be arriving with newly found growth optimism.

Proof is in the Pudding

For Australia, the choice to be the first G-7 country to increase rates, comes at a time when figures have become very promising.  According to the Governor Glenn Stevens following the rate decision, “overall, growth through 2010 looks likely to be close to trend.”  The tone is decisively more positive when compared to previous statements made during most of this year, citing that a low interest rate environment would be beneficial for the country.  Taking a look at some of the recent figures, there is ample hope of this momentum to continue.

  • Job vacancies have begun to open up despite an official unemployment rate that ticked higher to 6 percent.  The rate of unemployment actually pales in comparison with other trade partners – some of which are closer to 10 percent.
  • Consumer spending has returned to boost overall GDP figures.  For the record, consumer retail sales figures have been buoyed for four of the last six months by cash stimulus distributed in the first two quarters.
  • Consumer sentiment has remained relatively positive along with business sentiment.  The turn to a more optimistic tone for both sectors may very well help to sustain the current momentum.
  • Inflationary pressures remain subdued.  According to recent figures published by the Bureau of Statistics, the most recent quarterly rate of inflation printed a rise of just 0.5%.  Previous indications held the rate of consumer price increases to 1.5% in the second quarter, still below the benchmark target of 2-3% for the Reserve Bank.
Ranked Above The Rest

Ranked Above The Rest

Given the recent string of positive economic data, it’s no wonder the RBA elected to increase rates.  With economic growth inching higher and unemployment and housing stabilizing, policy makers will likely turn their focus to inflationary pressures in the short term, and away from growth and recovery.  The theory was echoed through further statements by Governor Stevens.  With “the risk of serious economic contraction” dissipating, “the board’s view is that it is now prudent to begin gradually lessening the stimulus provided” and hopefully “keep inflation consistent with the target over the years ahead.”

What to Expect

The subsequent statements by the Reserve Bank of Australia have helped to support a mini rally in the underlying currency.  With the Federal Reserve likely to react last among G-7 counterparts in raising interest rates, carry trade speculators will continue to jump on the Aussie band wagon.  The sentiment has been more than supported with market participants targeting the fact of further rate increases in the near future rather than just today’s one announcement.

AUD Pairs Rise On The Day

AUD Pairs Rise On The Day

Additional increases in the AUD overnight cash rate will widen the differential between US and Australian rate bearing instruments, making Aussie dollars more attractive.

However, the current momentum may hit a snag should sentiment surface that the RBA may have moved to soon.  New and existing homeowners who have bought into the lower rates are now paying extra per month on domestic based mortgages.  Should this increase in monthly payments deplete potential discretionary income, today’s decision may have very well choked off any further growth in the longer term.

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About the Author -

Richard C. Lee is the Chief Currency Strategist for OnlineForexTrading.com. Employing both fundamental and technical models, Richard has previously been featured on DailyFX.com, Bloomberg, FX Street.com, Yahoo Finance and Trading Markets.com. In analyzing the markets, he draws from an extensive experience trading fixed income and spot currency markets in addition to previous bouts in options, futures and equities.

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