Australian Dollar Rebound from last week - Forex Forum |Forex | Forex Trading

RealInose · 05-06-2009, 10:30 AM

It was all one way – up – for the AUD in the last week, beginning the week around $US0.71 before shooting up to levels above $US0.75 at present. The main triggers for the AUD rebound were the decision of the RBA to hold fire on rates mid-week, some slightly better domestic and global data and a general feeling that the USD is long over due for a serious bout of weakness.

The AUD move was curious as it was overwhelming consensus for the RBA to leave the cash rate at 3% this week, so the actual decision was not a surprise. However, the Bank’s pervasive optimism in the accompanying statement placed a significant emphasis outsized weight on what it judges to be a notable turning point in Chinese economic growth and contraction in credit spreads, which appearing to overlook or downplay the worsening local outlook. Some believe the RBA will not be able to sit on 3% cash rates when GDP prints negative again (early June), and the unemployment rate soars through 7% (probably late Q3), hence look for the AUD to resettle around $US0.70 late in the third quarter when the RBA is compelled to cut.

In the interim, with Australia having the highest yields in the industrialized world and the market taking the RBA word as gospel, the AUD could spike in the next month or two.

Next Tuesday is the annual Budget from the Federal government – it could well have a huge impact on market sentiment given the stubbornness of the RBA is easing monetary policy further. On the one hand, the automatic stabilizers are killing revenue – company, capital gains and personal tax receipts will slump, while pro-growth spending and cash payments are very strong leading to budget
deficits of around 5¾% of GDP over the next two years. Last year, the budget surplus was 2% of GDP, highlighting the massive turn around in the fiscal position. Given plenty ofheads up warning from the Finance Minister and Treasury about how wide the deficit will be, the market will look for a mix of policies to promote growth, but also to keep the deficit from becoming so wide as to attract the interest from the ratings agencies.

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