Is The RBA Being Too Hawkish On The Aussie Economy?

As expected, the Reserve Bank of Australia decided to keep rates steady at 4.75%, after they had raised rates seven times within the span of a year. According to Glenn Stevens and his central bank-mates, inflation ain’t a problem, and should remain within its target band of 2% to 3% for the rest of 2011.

In addition, the RBA feels that 2011 could be a good year for the Land Down Under. It expects the unemployment rate to dip to 4.25% (down from the current level of 5.0%) and for GDP to grow by 4.25%, despite the recent floods. For those of you keeping count, yes, the RBA actually INCREASED its growth forecast from 3.75%!

Still, one has to wonder if the RBA can continue to keep rates high or even raise them in coming months.

Recall that Australia’s employment numbers didn’t exactly get a standing ovation from markets last December when only 2,300 workers were added to the workforce compared to the 25,000 that analysts were expecting. Also, market geeks say that the unemployment rate only dropped from 5.2% to 5.0% because more people stopped looking for work. Tsk tsk.

And lest we forget, we also saw a less-than-awesome retail sales report last Monday. Reports say that the Queensland floods during the holidays choked retail spending, so the data only reported a 0.2% increase in December.

Speaking of floods, the RBA also mentioned in its statement that it isn’t too concerned with its effects on the economy. But then again, we shouldn’t expect anything less from the RBA – part of its job is to show confidence!

As I said in the past Australia’s economic performance will depend greatly on how much damage was actually done. But at this point in time, it might still be too early to assess the full effects of the floods. We’ll probably have to wait until after the first quarter before we get a clear diagnosis, especially since Australia was just struck by a giant cyclone last week.

Right now, if you were to ask around, you would probably get mixed opinions as to how this will ultimately affect the economy. There are those who prefer to look at the big picture and see the floods as a long-term burden because of the damage it has caused to Australia’s production facilities. On the other hand, there are those who believe that the process of rebuilding will help boost Aussie GDP in the short-term.

So how will this all play out for the Aussie dollar? So far, contrary to what you’d expect, it’s been able to hold its head above water quite well.

AUD/USD Chart

As you can clearly see, AUD/USD is still alive and kicking above parity, threatening to make new all-time highs. Now I’m not one to make predictions, but the fact that the pair is making higher lows while continually testing resistance at 1.0200 suggests its gearing up to rise higher. Who knows, it might just be waiting for Thursday’s employment data before it launches to new heights.

  • donkeykong

    i think it’s going up for now.
    if u look at a 40 SMA. the price is above it.

  • donkeykong

    do u know who computes the prices? is it a computer? how does it compute it?

    like who decides the price should go up 1 pip now or down?

  • donkeykong

    i think it’s going up for now.
    if u look at a 40 SMA. the price is above it.

  • donkeykong

    do u know who computes the prices? is it a computer? how does it compute it?

    like who decides the price should go up 1 pip now or down?

  • ForexGump

    Prices are determined by supply and demand. They are determined by banks. Here’s more on how the interbank market works: /school/history-of-retail-fx.html

  • ForexGump

    Here’s another informative link: /school/forex-market-structure.html

  • ForexGump

    Prices are determined by supply and demand. They are determined by banks. Here’s more on how the interbank market works: link to babypips.com

  • ForexGump

    Here’s another informative link: link to babypips.com