The Reserve Bank of Australia (RBA) yesterday left its benchmark overnight lending rate unchanged at 4.75 per cent as expected. The RBA noted: “For Australia, the terms of trade are at their highest level since the early 1950s and national income is growing strongly as a result. Over the next few quarters, inflation is expected to be little changed.”

Recent data has been weak, leading many analysts to conclude that the RBA may be finished with its tightening cycle. For example, the latest reading of the country’s GDP growth rate was a tepid 0.2 per cent while retail sales contracted by 1.1 per cent. However, the RBA was not as dovish as market players had feared and the monetary authorities left the door open for further hikes. While the RBA admitted that lending rates in the economy are now a little above average, it also noted that after the significant decline last year, growth in wages has picked up somewhat with some further increase likely over the coming year.

Employment growth is likely to be the key driver of trade for Aussie dollar-US dollar in the near term. Tonight, the market will get a look at Australia’s November labour data with expectations for 21,000 new jobs. If employment continues to expand at this healthy pace, traders will begin to price in another 25 basis points rate hike in the first quarter of 2011. This will help to fuel further gains in the Aussie as it tries to retake the $1.000 barrier. But if labour demand cools considerably, then the Aussie’s recent rally is likely to hit a wall. Rumours that China intends to hike its rate at the weekend could also be bearish. In short, the next few days should prove to be volatile for Aussie dollar-US dollar as the battle between the bulls and the bears hits its peak.

Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read commentary at or e-mail