Something extremely subtle shifted in the weeks after its October decision causing the Reserve Bank of Australia to change its mind from a steady policy setting. On Tuesday the central bank added a further notch to its belt by lifting interest rates by one quarter of one percent to 4.75%. This is the first time in six months it’s acted and based upon the accompanying verbiage, there could very well be more to come further down the road before it can signal the all-clear.
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Aussie dollar – At the time of its October meeting, the RBA said that its decision to leave policy alone was “finely balanced.” It also noted that the rising Australian dollar was playing a role in restraining growth. Making today’s move even more unusual is that during the last several weeks, a key reading of inflation surprised analysts by turning back down deeper into the central bank’s target range. However, the Reserve Bank appears to have upped the ante somewhat by nudging policy further upwards when it said that there now appears to be “relatively modest amounts of spare capacity” in the economy. It also said that price trends were less comforting with a risk of “inflation rising again over the medium-term.” This tells us that the Bank fears that the economy is moving to a different plane where the risk of policy error is greater. This occurs when resource slack has been utilized and tighter labor markets can create price pressures within the economy. Unlike the rest of the world, the domestic economy merely toyed with recession and as a result of the rebound across Asia, its rate of unemployment is already low at 5.1%. The RBA cited trends in job vacancies as a concern over the tightening labor market.
With few analysts actually calling today’s move right, the Aussie has jumped back through parity against the U.S. dollar on the prospect for a further divergence between local policy and that around the developed world. The Aussie currently buys 99.88 U.S. cents and rose broadly. Against the yen it buys ¥80.84 while it also rose against the pound which today buys A$1.6011. The euro buys fewer local dollars after the rate increase and stands at A$1.3991.
U.S. Dollar – The Australian move broadly encouraged risk appetite, sending Asian stocks higher and reviving U.S. dollar sales. The dollar’s trade-weighted value slid by 0.4% to 77.00 as dealers still expect the Fed will announce a large amount of quantitative easing midweek. Stronger manufacturing data around the world released on Monday suggest that commodity demand remains strong, which has a natural effect of maintaining pressure on the dollar given their appeal as an alternative asset to the greenback.
Japanese yen – Finance Minister Noda spoke on Tuesday in Tokyo and again sounded pretty forceful, noting that the government continued to monitor the currency markets. And the central bank is ready to act on its behalf taking bold action if and when necessary. One can’t help but feel that the yen’s gains still amount to little more than dollar weakness rather than a pattern of a more volatile yen that would provide authorities in Japan the rationale to intervene. In early New York trading the yen has started to fall pretty sharply with the dollar now stretching to ¥80.96 according to Interactive Brokers data.
British pound – A slide in activity across the construction sector was enough to unwind much of the pound’s two-day gain that had propelled its value against the dollar towards a nine-month high. Dealers had expected the PMI construction index to dip marginally from a September reading of 53.8 to 53.0. In the event the index headed straight towards the breakeven rate and fell to 51.6, which clearly unsettled recent bullish buyers. The pound slumped back to $1.5981 as the euro also made gains against the unit rising to 87.41 pence. In the bigger picture, today’s data vilifies consensus views.
Euro – Manufacturing activity expanded again during October according to the PMI manufacturing survey. The September index of 54.1 was expected to remain unchanged. However, better conditions across European manufacturing expanded activity within the sector pushing the index to 54.6 keeping the euro buoyant against the dollar at $1.3990.
Canadian dollar – The Canadian dollar remains elevated in light of all round weakness in the value of the greenback and ongoing flows into commodities. The Aussie rate rise hasn’t harmed the loonie either and reminds investors that the road to recovery is fuelled by temporarily idle resources that eventually run dry and run the risk of stoking inflation. The Canadian unit today sits towards the top of its early intraday range at 98.90 U.S. cents.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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