AUD at parity after surprise RBA hike

Australia’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 nation’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 “risk of inflation rising” remains, Reserve Bank of Australia Governor Glenn Stevens said in a statement following the decision to raise the benchmark rate. Australia’s currency was also bolstered by speculation the Federal Reserve and Bank of Japan will take further monetary- easing measures this week, widening Australia’s yield advantage.

“Clearly the RBA still has a tightening bias,” said Sue Trinh, a senior currency strategist in Hong Kong at Royal Bank of Canada. “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.”

Australia’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 economists’ forecasts.

Australia’s benchmark rate compares with as low as zero in the U.S. and Japan, attract investors to the South Pacific nation’s higher-yielding assets. The risk in such trades is that currency market moves will erase profits.

Fed QE

“The economy is now subject to a large expansionary shock,” Stevens said in the statement today. “The risk of inflation rising again over the medium term remains.”

Gains in the currency may be limited as “a December rate hike is very unlikely,” said Grant Turley, a senior foreign- exchange strategist with Australia & New Zealand Banking Group Ltd. in Sydney. “From here it’s going to be about the U.S. dollar and QE expectations,” said Turley, who expects some “modest” 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.

Bloomberg

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell