I guess they really do have everything backwards in the Land Down Under, eh? How come, you ask? Well, RBA Governor Glenn Stevens and his mates put on their Mountaineer costumers and decided to hike interest rates!
Defying market expectations, the Reserve Bank of Australia surprised the markets yet again, this time by raising its cash rate by 25 basis points, bringing the rate up to 4.75%. Many had expected that after failing to hike interest rates in October, the RBA would refrain from doing so this month. Ha! That just goes to show that anything can happen in the markets, and we should always be ready!
And now many forex junkies are asking, "What would motivate the RBA to pull a fast one on the markets?"
As my forex minions told me, the RBA is racing against inflationary pressures--now at 2.8% in Q3. Australia's growing public spending and private lending numbers have already boosted aggregate demand, and the rise in manufacturing demand from China, Australia's largest trading partner, is also joining the inflation-friendly parade.
Also, take note that the RBA doesn't meet in January. And with signs that inflation is propping up, the central bank isn't taking any chances! You see, even though inflationary measures have slowed in the second quarter, the RBA doesn't want to see a repeat of the past. In 2007, inflation rocketed to 4.5% and the central bank was forced to play catch up as it had refrained from raising rates the year before.
Now, we all know what rate hikes mean for a currency. It's like when Cyclopip eats all those bunnies (Don't judge! It makes him stronger!) Just look at how the Aussie bulls reacted to the news:
As you can see, the unexpected announcement came as a pleasant surprise to Aussie bulls as AUD/USD leapt about 100 pips in less than an hour. Now it looks like the Aussie is poised to hit parity against Greenback once again. If you recall last week, the Aussie's stint above 1.0000 was short-lived as it was strongly rejected after hitting a high of 1.0003 against the Greenback.
Those who have called for parity claim that it has been a long time coming. After all, the Aussie has rallied magnificently from its yearly low of .8067 back in May 2010. And according to the central bank's latest statement, it could be headed even higher. The boys over at the RBA believe that inflation will probably rise over the next few years, which suggests further monetary policy tightening. Smells like more rate hikes to me!
On the other side of the globe, the U.S. draws ever closer to pulling out the quantitative easing card. The charts seem to say the markets have already largely priced in a second round of easing. The only question left on the minds of investors is the amount and timing.
In any case, we won't have to wait long to find out if the Aussie can sustain its gains past parity. The Fed's big statement is just a day away, and this will likely be a make-or-break event for AUD/USD. Who will you be siding with? The good old USD, or the up-and-coming AUD?
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- Why China Keeps On Hiking 05:20 17 January 2011