Carry on carry trading the Aussie dollar as rates held
THE Reserve Bank of Australia caught the markets by surprise after holding interest rates yesterday – contrary to the expected cut.
With December retail figures contracting, house prices dropping an average of 4.8 per cent year-on-year and housing construction in a 20 month slump, traders were poised for a 0.25 per cent cut in rate from the current 4.25 per cent overnight rate. Despite the lacklustre domestic outlook, the Australian central bank instead appears to have put its faith in the ability of external demand to hold up the Australian economy. The central bank policymakers took the gamble that Chinese growth and some form of lasting solution to the European mess would drive demand for Australian commodities.
“With growth expected to be close to trend and inflation close to target, the Board judged that the setting of monetary policy was appropriate for the moment,” said RBA governor Glenn Stevens, adding: “Should demand conditions weaken materially, the inflation outlook would provide scope for easier monetary policy.”
Richard Wiltshire, chief FX dealer at ETX Capital, saw relatively light flows after the initial spike in Aussie dollar and its crosses – local banks were good sellers from the highs from the first move up to around $1.0800, but turned into buyers in the dips in the pair. “During the European session, despite a bit of early morning follow through after the RBA on hold surprise, Aussie dollar met some profit taking,” says Wiltshire. “They will be monitoring demand going forward and the risks remain for a cut at future meetings, so that’s being factored into the price action.”
CARRYING ON
The Aussie dollar has seen support from rising US dollar denominated commodity prices as well as from its attractive yield differential against the other majors. With the US, British and Japanese central banks holding their interest rates at close to zero and the Australian overnight rate being held at 4.25 per cent, the yield differential against the Australian currency presents an attractive proposition for carry traders borrowing in one of these low yield currencies to purchase the high-yield Aussie dollar. The dollar-Aussie dollar move is particularly attractive after the Fed announced its intention to continue to supress interest rates until 2014. “I like the Aussie dollar-dollar carry trade for one simple reason: complacency,” says David Rodriguez, quantitative strategist for FXCM. “Markets are so cosy and comfortable with recent US S&P 500 strength that forex options’ expected volatility levels on the Australian dollar-dollar pair are near their lowest since 2008.” Rodriguez adds: “Complacency has markets in a trance and fuels risk-taking – I doubt this rally will end before the music stops.”