Plunging throughout the New York session, the Australian dollar seems to have found some solid ground heading into the European open. Incidentally, helping the currency’s gain is the newly released report showing a nice popup in economic growth for the country. Although expected to only show a mild 0.3 percent uptick for the second quarter, the actual figure jumped by 0.6 percent.
The improvement signals nothing but a turnaround for the land down under, similar to Japan, as the Bureau of Statistics release rose to double what analysts had been anticipating. Specifically, strong consumption fueled by stimulus packages and optimistic consumer and business confidence have led the recovery, which some still tout as teetering on the balance. However, with manufacturing rising for the first time in over a year and construction sector growth on the mend, it’s hard not to see the silver lining.
Nonetheless, the Reserve Bank of Australia is expected to remain accommodative in its monetary policy stance, leaving the overnight cash rate at the lowest level it has been in 49 years. But for how long? Taking a look at statements made by central bankers following the decision, the case for the rather loose monetary policy may not be as solidified as earlier expected now that improvements have surfaced. Given the recent improvements across the board, policy makers have changed their tone a bit, noting that inflationary pressures may be on the horizon.
Although the board decided that “the present accommodative setting of monetary policy remains appropriate for the time being”, the longer term probability “of inflation being persistently below the target now looks low.” The sentiment supports what market speculators have been betting on since the beginning of the summer – that rates are likely to rise by 175 basis points in the next 12 months.
The conviction was so that markets were pricing in a 50 percent chance of at least one move higher at the end of the year. And why not? Since the credit crisis abated (whether temporarily or permanently), investment continues to prop up the Aussie, which has skyrocketed since being bought up from the 0.6300 figure back in March. With more and more money entering the market on a yield searching basis, prices are expected to rise in tandem with underlying valuations.
As a result, even as the short term picture may be pushing for some intermediate downside in the currency pair, the longer term outlook continues to remain bright for the Aussie. Fundamentals continue to push for a higher valuation as we head into the final quarter of the year, as technicals point to some potential retracement from the recent runup. Longer term traders will likely do well to keep an eye on this carry currency favorite.
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