Overnight, the March Australian Dollar futures contract touched a high not seen since late July after the Reserve Bank of Australia surprisingly kept its benchmark interest rate at 4.25%. Economists had been expecting another cut from the central bank.
Steady growth and an optimistic outlook for inflation were the key contributing factors to the decision. The monetary policy statement included the line, “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.”
Bucking the trend it created when it made quarter-point rate cuts at its last two meetings of 2011, the Australian central bank decided at its first meeting of 2012 to leave interest rates unchanged. The market was swift to react as it pushed futures prices to their highest levels since the nearby futures contract reached a top at 1.0789 on July 27, 2011.
Besides growth and inflation, the RBA also mentioned the financial pressures on European banks. After expressing worries about the European banking situation in 2011, the central bank said “Much remains to be done to put European sovereigns and banks on a sound footing, but some progress has been made.”
By reducing the fear of a global economic meltdown, the RBA was able to concentrate its analysis on factors directly affecting the Australian economy. “Information on the Australian economy continues to suggest growth close to trend, with differences between sectors, according to RBA Governor Glenn Stevens. He also added that over the next one to two years, underlying inflation is expected to fall within the bank’s 2.00 percent to 3.00 percent target range.
Although Stevens believes that the key to futures rate cuts depends on whether inflation has been tamed or not, he knows that he now has room to adjust the monetary policy in the future as he sees fit. He also acknowledges that he must continue monitor the financial and economic landscape and “adjust the cash rate as necessary to foster sustainable growth and low inflation.”
Some analysts are interpreting the above statement to mean that the RBA board has adopted a dovish bias and that Tuesday’s decision to keep rates unchanged was merely a short-term pause to gauge the situation in Europe. This is most likely because since its last meeting, the Euro has bottomed, the European Central Bank has held interest rates steady and the outlook for a solution to the Greek debt crisis has improved.
Although the U.S., Japan and the U.K. are all holding interest rates at near zero, the RBA feels it needs more time to assess the situation. Based on the surge in prices, Australian Dollar traders do not seem to be too concerned that interest rates will decline over the near-term despite forecasts of a 3.50 percent cash rate by mid-year.
Technically, the March Australian Dollar is in the midst of a powerful uptrend. Since bottoming at 1.0065 on January 9, the Aussie has not had two-consecutive lower-lows. Although this indicates strength, it should also serve as a key topping indicator should the pattern begin to change. Traders should also begin to monitor short-term momentum indicators for signs of a slowdown in the rally.
