AustraliaÃ¢â‚¬â„¢s dollar climbed to parity with the greenback after the central bank unexpectedly raised interest rates for the first time in six months, spurring demand for the nationÃ¢â‚¬â„¢s assets.
The so-called Aussie rose to match the U.S. dollar on Oct. 15, the only previous time it has done so since currency controls were lifted in 1983. The Ã¢â‚¬Å“risk of inflation risingÃ¢â‚¬Â remains, Reserve Bank of Australia Governor Glenn Stevens said in a statement following the decision to raise the benchmark rate. AustraliaÃ¢â‚¬â„¢s currency was also bolstered by speculation the Federal Reserve and Bank of Japan will take further monetary- easing measures this week, widening AustraliaÃ¢â‚¬â„¢s yield advantage.
Ã¢â‚¬Å“Clearly the RBA still has a tightening bias,Ã¢â‚¬Â said Sue Trinh, a senior currency strategist in Hong Kong at Royal Bank of Canada. Ã¢â‚¬Å“In an environment where the Fed is mulling quantitative easing and talk of the Bank of Japan following closely behind and possibly even the Bank of England, the RBA sticks out.Ã¢â‚¬Â
AustraliaÃ¢â‚¬â„¢s currency surged 1.2 percent to 99.93 U.S. cents as of 8 a.m. in London from 98.71 cents in New York yesterday. It earlier reached $1.0003. The Aussie climbed 1.4 percent to 80.55 yen.
Stevens raised the overnight cash rate target by a quarter percentage point to 4.75 percent. The decision, predicted by seven of 24 economists surveyed by Bloomberg News, was the second straight in which Stevens defied the majority of economistsÃ¢â‚¬â„¢ forecasts.
AustraliaÃ¢â‚¬â„¢s benchmark rate compares with as low as zero in the U.S. and Japan, attract investors to the South Pacific nationÃ¢â‚¬â„¢s higher-yielding assets. The risk in such trades is that currency market moves will erase profits.
Ã¢â‚¬Å“The economy is now subject to a large expansionary shock,Ã¢â‚¬Â Stevens said in the statement today. Ã¢â‚¬Å“The risk of inflation rising again over the medium term remains.Ã¢â‚¬Â
Gains in the currency may be limited as Ã¢â‚¬Å“a December rate hike is very unlikely,Ã¢â‚¬Â said Grant Turley, a senior foreign- exchange strategist with Australia & New Zealand Banking Group Ltd. in Sydney. Ã¢â‚¬Å“From here itÃ¢â‚¬â„¢s going to be about the U.S. dollar and QE expectations,Ã¢â‚¬Â said Turley, who expects some Ã¢â‚¬Å“modestÃ¢â‚¬Â strength in the greenback over the coming weeks.
Commonwealth Bank of Australia said today it will raise the interest rate on its standard variable home loans by 0.45 percentage point.
The Fed will probably begin another round of unconventional monetary easing this week by announcing a plan to buy at least $500 billion of long-term securities, according to economists surveyed by Bloomberg News.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.