NEWS / Foreign Exchange

RBA stays on hold til after CPI data

Currency View

??? RBA stays on hold til after CPI data April 24
??? AUD and NZD buy the dip opportunity
??? Complacency about US dollar suggests a big move a foot

The Reserve Bank of Australia remained on hold today, much to my embarrassment having called a definite hike. Perhaps I was still thinking of the previous governor! Then again could it be an election year?

The RBA has chosen a more prudent approach and is awaiting the quarterly inflationary data which will be released prior to the next meeting. Given the broad run of data, and early indications are that even NSW and Victoria are already rebounding from their slump, we may be facing with continued commodity demand, dramatic increases in farm exports, and an eastern seaboard recovery, an overheating Australian economy by year end. With inflation at the top of the band on core data, and above on headline, this pause by the RBA could lead to it having to hike rates even further toward year end.

A lot can clearly happen over the next month, but the picture is suddenly quite positive the overall economy again and not just Western Australia, while broad capacity constraints and strong employment suggest the RBA has to hike.

The currency markets will view this as a delay only to further rate hikes, and by no means an end to the process. Fund managers in Europe and the US are quite aware that Asia remains strong as does the demand for Australia??™s commodities.

Furthermore whether the RBA hikes or not, the Australian yield remains extremely attractive as it is.

The Australian dollar is still a bull market.

Technically the AUD is having a correction, but it looks one to buy to me. There is a window of opportunity over the next 24 hours for a further profit taking sell off, perhaps toward .8015 or even .7950 if a major player decided to step out, but the more likely scenario is support in the .8060/40 region containing this down move, and yield players again coming in to buy this dip. A move above .8100 again at any time would signal this correction had run its course. Target this year is 86 cents.

The New Zealand dollar has been spuriously sold down in sympathy with the AUD, but with an even better yield and a more hawkish central banks it can be expected to recover very quickly.

Let??™s not forget the global environment which is one of a weak US dollar.

It is interesting how quickly the market seeks to spin a positive US dollar story, simply because it stopped falling for a couple of days. This suggests many major institutions around the globe are still long the US dollar in terms of capital and portfolio allocations.

The Euro has retreated from the 1.3400/10 resistance area, but to me seems to be merely building energy to go yet higher again. The technical view on the Euro, as an indicator to the US dollar overall, remains bullish while support at 1.3060 holds, clearly so above 1.3230, and even aggressively so while 1.3285 holds. A break of 1.3410, when it comes, is likely to see 1.3650 quite quickly. Medium term targets remain 1.39 - 1.45.