RBA is Optimistic
In its last interest rate decision, the Reserve Bank of Australia (RBA) decided that it would be apt to keep rates unchanged. This came as huge surprise to market participants because they actually had thought that the debt crisis in Europe would prompt the bank to cut rates.
According to the central bank, despite the events in Europe, other pieces of data are pointing to expansion. In both the U.S. and China, economic data was “quite robust” in the last two quarters of 2011. Commodity prices were also a concern. While they have fallen off their highs, they were still at elevated levels, and could rise further if they cut rates.
Gillard Beats Out Rudd
Just a couple weeks back, a dark cloud covered the Australian political scene, as former Prime Minister Kevin Rudd called out incumbent PM Julia Gillard and publicly challenged her leadership. In response, Gillard called for a leadership vote, to prove that she had the backing of the Labor Party.
This weighed down on the Australian dollar, as market players became concerned with where this was headed.
Thankfully though, Gillard beat out Rudd, and did it in convincing fashion. She gathered 71 out of the 102 votes to run away with the victory. This indicates that she has support from the Labor party, which should buy her time to implement her wanted reforms.
Moreover, this should help alleviate concerns over the entire political situation and entice fund managers to shift their funds over to Australia.
Sentiment Rising in Europe and the U.S.
If you weren’t too busy honing your Call of Duty skills, you probably would have heard that Greece was actually handed a second bailout recently. This helped ease some of the tension in the markets, as it showed that the euro zone wasn’t about to let Greece default and let contagion take over. This also contributed in bringing down bond yields and boosting equities higher.
Last week we also saw the ECB conduct another round of its LTRO program. There was some optimism surrounding the results because even though the amount (529.50 billion EUR) was bigger than the first time, more small and medium-sized banks participated. With these banks focusing on lending smaller companies, many are optimistic that the liquidity measures will have the desired trickle-down effect.
Meanwhile, on the other side of the Atlantic, we got a shock when Federal Reserve Chairman Ben Bernanke said in a speech last week that there was no immediate need for additional liquidity measures. That’s right folks – according to Big Ben, there’s no need for QE3 right now!
While this initially benefited the U.S. dollar, I think that this could boost risk appetite over the medium-term. This is a signal that the Fed believes in the recovery of the global economy, which should encourage some risk-taking later down the road.
What does this mean for the Aussie?
The weekly chart hints that AUD/USD could actually start rallying again. Despite the choppiness, the pair has remained resilient by trading in a relatively tight horizontal range.
Under normal circumstances, this doesn’t mean anything, but the strong rise the weeks prior the consolidation has resulted in the pair forming a bullish flag. If sentiment improves, the pair could breakout and soar to new highs.