AUSSIE WILL HAVE TO WAIT TO HIT PARITY

DIRECTOR OF CURRENCY RESEARCH, GFT

Yesterday’s decision by the Reserve Bank of Australia (RBA) to keep rates steady surprised the currency markets and sent the Aussie tumbling in reaction to the news. Prior to the release traders had been relatively certain (75 per cent) that rates would increase by 25 basis points.

In fact, over the past week the buying pressure on the Aussie had been so strong that markets were acting like it was a foregone conclusion that Aussie-US dollar would reach parity before year-end. While the prospect of parity still remains a serious possibility, I believe its chances have been greatly diminished by the RBA’s latest actions. It hinted at an additional hike in November in its statement: “If economic conditions evolve as the Board currently expects, it is likely that higher interest rates will be required, at some point, to ensure that inflation remains consistent with the medium-term target.”

But its decision is by no means assured and likely to be governed by several key releases over the near term including tonight’s employment data report as well as the third quarter CPI inflation release on 27 October. Recent economic data has been respectable but hardly robust. For example, yesterday’s retail sales rose only 0.3 per cent versus 0.5 per cent forecast. Furthermore, the housing market – which is the true driver of RBA monetary policy – has been relatively weak for some time. Building approvals contracted for the fourth month out of the past five, suggesting that RBA’s program of consistent monetary tightening is beginning to take its toll.

Therefore, all talk of Aussie going to parity versus the greenback should ease for the time being as traders adjust their expectations of Australian short-term rates. It remains the highest-yielding currency in the G10 but yesterday’s surprising announcement should slow its ascent with the US$0.9750 level becoming a key resistance point in the pair. For now it appears that any move towards parity can occur only if we see another broad sell-off in the greenback caused by further concerns of a US economic slowdown.

Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read commentary at www.GFTUK.com/commentary or e-mail borisandkathy@gftuk.com.