Aussie Rallies as Interest Rate Likely to be Unchanged
By: Eddy Peng May 1, 2017
Aussie dollar received some rebound from 4-month low records, partly erasing the dramatic drop earlier last week. It was up 0.34 percent against the dollar at 0.74873 on Friday last week. Since the end of March it has been experiencing three week’s sharp drop to three-month lows as U.S. Federal Reserve announced the 25 basis point of rate hike to manage potential financial risks.
Australia’s central bank is unlikely to shift current policy at Tuesday’s meeting, leaving the benchmark interest rate unchanged at 1.5 percent for a ninth month, money markets bet and economists predict, after the CPI released last week showed inflation creeping higher at 2.1 percent. A day later, the government moved to fund major infrastructure projects by redefining its debt, which is potentially adding long overdue fiscal stimulus to the economy.
Economists commented that the fact that inflation has lifted from its lows probably reinforces the Reserve Bank’s inclination not to do anything and the noise around infrastructure spending only adds to that case. The RBA has a fine line to tread. Its record-low cash rate is designed to steer the economy away from mining and towards services and manufacturing industries. Indeed, Governor Philip Lowe said signs reveal that non-resources investment is finally lifting.
Increased CPI has been largely contributed by soaring house prices in Sydney and Melbourne and private debt to record levels, which makes rate hikes become possible in Australia. However, lifting interest rates in response is too risky, because it would damage the economic recovery given slack in the labour market, record-low wage growth and inflation that remains tepid despite recent gains.
Australia’s biggest export, iron ore, at the same time has fallen into a bear market, potentially undermining any boost to government revenues from an unexpected rally in prices last year. The Aussie dollar, which normally tracks commodity prices, has remained fairly static around the 75 U.S. cent mark, providing a headwind for key exports such as education and tourism.
U.S. dollar index remains static recently and finds supports on the 200-day moving average. Concern about Trump’s tax reform is still a crucial factor that determines future movement of the dollar, but in the short term if it is not breaking to the MA200, technical support is likely to lead some rebound. In concerning the prospect of its moving in a few weeks, the narrow gap between trendlines will trigger another new moving trend.
Chart 1: USD Index Daily
Similarly in the daily movement of the Aussie dollar, it is now converging to wait for a new breakout after rally from the support line in green. The RSI(14) shows it’s trading in the bearish market, meaning that traders keep looking for a short position on it with considering potential rebound of the U.S. dollar.
Chart 2: AUDUSD Daily
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