RBA: Is Now The Time To Raise Rates?

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In its last meeting, the Reserve Bank of Australia surprised the markets by NOT raising interest rates. Given the recent developments in the Australian economy, could now be the time to hike?

At the last meeting, the RBA came under the “wait and see” flu and decided to halt any rate hikes in the meantime. As I pointed out in my follow-up post here regarding the bank’s last decision, RBA governor Glenn Stevens said that he wanted to see what effects the end of 2009 rate hikes had on the economy.

That was over a month ago, and as we know, anything can happen in a month’s time!

Word from Down Under is that the central bank is looking to raise the cash rate by another 0.25% to bring it to 4.0%. Let’s take a look at recent data to see whether they really warrant a rate hike or not…

Indeed there are reasons to support the possibility that the RBA will resume hiking its rate tomorrow. One of the main points fueling such speculation is the surprise surge in Australia’s business investments. Australia’s private capital expenditure, which takes up about 28% of the country’s total output, unexpectedly jumped by 5.5% during the fourth quarter of 2009 after slipping by 5.2%. Robust Chinese consumption for raw materials has been encouraging private firms to make capital expansions in order to cope up with the rising demand.

Another upside in Australia’s economy was the upturn in its labor market. Firms added about 52,700 in January, bringing the nation’s unemployment rate down to 5.3% from 5.5%. Typically, having an optimistic outlook in jobs would encourage people to spend more, which in turn would spur the country’s economic activity. In fact, the total value of credit issued to private consumers (businesses and individuals) increased by 0.4% in January, indicating a rise in consumption.

Now, what would this mean for forex traders like you and me?

The Aussie’s price action for the upcoming interest rate decision would probably be a carbon copy of February’s announcement. Remember the RBA decided to “do a Fed” and adopted a wait-and-see attitude last month. If they do the same tomorrow, we could see a quick-sell off to the Aussie. Conversely, a rate hike, even if it is already expected, would likely lead to an appreciation of the Aussie.

Keep in mind, however, once the European and US session went underway, the Aussie eventually found its rhythm and erased the losses it incurred earlier that day. What gives? What’s holding the Aussie up? What’s keeping the Aussie from suffering the same losses as the euro and the pound?

Even if the RBA extends its rate hike hiatus for another month, the bullish sentiment for the Aussie is likely to stay intact. After all, Australia is still holds the top spot as one of the best performing economies amidst the global recession and its aftermath. As I mentioned earlier, Australia’s economy seems to be improving consistently, unlike the US and Japan which are currently suffering a bout of weak fundamentals or the European economies which are plagued by debt problems.

In fact, the gap between the under-performing and better-performing nations appears to be growing wider and wider as the global economy struggles to get back on its feet. On one side of the globe, we have the UK and the euro zone unable to move on from a long period of low interest rates and massive easing policies. On the other side, Australia and the rest of the commodity-dependent economies are relatively better-off as prospects of interest rate hikes and exit strategies draw closer.

An extended period of record-low interest rates versus the possibility of further rate hikes… What are we looking at here? If you’re thinking about carry trades, then we’re on the same page! Interest rate differentials, which represent the difference between two nations’ central bank rates, could play an important role in price action throughout the year. Of course traders would rather stick with those currencies whose nations are more likely to enjoy rate hikes in the future, right? Well, I wouldn’t want to get left behind!

Long AUDJPY anyone?