THE AUSSIE IS NOT JUST A RISK PLAY
DIRECTOR OF CURRENCY RESEARCH, GFT
WITH the economic calendar light on both sides of the Atlantic this week, the most interesting event risk is taking place down under where the Reserve Bank of Australia (RBA) just left its benchmark rates unchanged at 4.5 per cent. Although the RBA acknowledged that the global recovery is beginning to slow, the policymakers in Sydney did not signal the end of its tightening cycle. Instead the RBA surprised the market by providing a relatively upbeat assessment of Australian economic conditions indicating that this month’s action was merely a pause.
The RBA’s next policy move is likely to be dictated by the strength of the labour market and the extent of the inflationary pressures percolating in the system. To that end, tonight’s employment report and the CPI data due on 28 July will be key factors in determining the likelihood of further rate increases for the rest of 2010. Given the persistent rise in inflation expectations and the pickup in the employment subcomponent of the latest Services PMI report, there is some evidence that both data points will surprise to the upside, eliciting a more hawkish posture from the RBA.
Still, even with supportive economic data on the domestic front, demand from China will remain the most important driver of Australian monetary policy going forward. If Chinese growth begins to cool markedly over the next several months, the RBA is likely to err on the side of caution even if inflationary pressures continue to persist.
Growth however, is just one part of the story. The Aussie remains one of the most attractive G-20 currencies on a balance sheet basis. With a positive trade balance for the past two months in a row, a plan to return to a budget surplus by 2012 and the highest yield in the G-20 universe the Aussie may no longer be just a play on risk. In contrast to the Herculean fiscal problems facing the Eurozone and US, Australia’s well managed economy stands as an example of financial probity in the industrialized world and may now start to attract investors looking for safety instead of merely speculators seeking yield.