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AUD pushes towards $1.10, no change imminent

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AUD pushes towards $1.10, no change imminent article image
Currency Market Update Consumer Price Index rise more than expected pushing the AUD to another record high for against the USD; Bernanke comments overnight indicate no imminent tightening of US monetary policy EVENT: The Australian Bureau of Statistics released Consumer Price Index (CPI) data for the March quarter yesterday, showing a headline rate increase of 1.6 percent which exceeded market expectations of a 1.2 percent rise. IMPACTS: On an annualised basis, inflation is now above the RBA’s target inflation range of two-to-three percent which will ensure the RBA keeps an especially close eye on inflation data for the June quarter. The market is currently pricing in at least one, if not two, interest rate rises before the end of the year. The CPI data added fuel to the AUD, which hit yet another record post-float high against the USD, reaching 1.0852 early Wednesday. CONSIDERATIONS: The RBA has consistently stated that it looks to the medium term when establishing monetary policy settings. With this in mind, it could well hold off raising interest rates at its meeting next Tuesday. If further inflationary pressures are revealed in June quarter data, the RBA may then be more inclined to act. Short-term factors clearly played some role in the higher than expected CPI figures. Instability in the Middle East and Northern Africa helped fuel higher oil prices whilst natural disasters in Queensland put upward pressure on fruit and vegetable prices. Rises in fruit, vegetable and fuel prices accounted for 0.7 percent of the 1.6 percent rise in inflation. Excluding the impact of these commodities, annualised inflation remains within the RBA’s target range, suggesting that an immediate interest rate rise next week may not be on the cards. Confidence in the USD is lagging across the board with all major currencies performing well against the greenback. Even in light of the recent natural disaster in Japan, the JPY is still performing relatively well against the USD. Collectively, this suggests that any marked decline in the AUD/USD exchange rate is unlikely to occur until the US economy improves significantly. Comments overnight by US Federal Reserve Chairman Ben Bernanke indicated that there would be no tightening of monetary policy in the short term. This led to the Aussie reaching another record high of 1.0879 against the USD earlier today. Any change to US monetary policy would lead to a narrowing of the interest rate differential between the US and Australia and create a downward force on the value of the Aussie. In contrast, Standard & Poor’s recent decision to place the debt of both the United States and Japan on a negative watch and the continued uncertainty surrounding Greek and Irish sovereign debt highlights the economic uncertainties at play in much of the rest of the world. A deterioration in the debt situation in the US, Japan or Europe could act as a catalyst to risk aversion and a move away from the AUD.

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