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Australian Dollar Looking to Establish Above Parity; We Question RBA Move
Written by article default Tuesday, 02 November 2010 12:48
In an Asian session where most major currencies are locked in some tight sideways trade, the Australian Dollar has exploded, with the single currency contemplating establishing itself above parity following a decision by the Reserve Bank of Australia which caught most of the market off guard. The general consensus had been that the RBA would leave rates on hold at 4.50% in light of some softer inflation data and concerns over a potential slowing in the global economy. But the central bank felt that inflation was a serious concern going forward and reacted by raising rates by 25bps to 4.75%.We remain highly skeptical of the latest move by the RBA and feel that a central bank that has already been overly aggressive with its tight monetary policy has now moved itself even further away from being able to deal with any potential slowdown in the economy. In a global macro environment where central banks have been very cautious with moves to raise interest rates on fears of a potential slowdown, the RBA continues to ignore potential red flags and tightens its own policy. Australia has the highest interest rate amongst the major currencies, and this aggressive monetary policy has helped to propel the antipodean to fresh post float record highs by parity.
We also find it extremely interesting to see such a disparity in the approach to monetary policy by the RBA relative to the Fed. While it is quite obvious that one central bank is tightening policy while the other is looking to accommodate further, this is not the disparity that we refer to. We find it quite fascinating that the RBA has been much less sensitive to market expectations, while the Fed has gone out of its way to be sensitive to what the markets are looking for. While we can certainly be critical of the Fed for gauging the opinion of the market to help make its decision, we are much more critical of an RBA that ignores consensusestimates and moves to raise rates in an environment where most would have been perfectly satisfied with a no-change decision.
We believe that just as there are risks to the US economy if the Fed is too accommodative this week, there are equal risks to the Australian economy if the RBA is too aggressive. In fact we would take it a step further and say that the Fed should be less concerned with market demands and more independent in its decision making, while the RBA should be more sensitive to what the markets are looking for.
Technically, we continue to argue that the Australian Dollar is by cyclical highs and this in conjunction with some stretched medium-term and longer-term studies, leaves the market at risk for a serious pullback over the near-term. While we would not rule out the possibility for another attempt to hold above parity, we do not expect to see any gains beyond this critical psychological barrier as sustainable. We have gone ahead and issued a recommendation to sell at 1.0005 today with an open objective and stop-loss by 1.0115.
Looking ahead, German manufacturing PMI (56.1 expected) is due at 8:55GMT, followed by Eurozone manufacturing PMI (54.1 expected) at 9:00GMT. UK construction PMI (53 expected) is then out at 9:30GMT. US equityfutures are tracking flat to higher, while commodities are moderately bid.
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