$A heavy; eyes on RBA and Fed

[HenryTo]

While the rest of the world continues to raise rates (with the notable exception of Britain), Australia remains somewhat alone as the Reserve Bank of Australia is expected to leave rates unchanged for the 8th time in a row this coming Wednesday.
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$A heavy; eyes on RBA and Fed
Nov 01 09:47
AFR wires

A heavy-looking Australian dollar remained mired below US75¢ on Tuesday as the Reserve Bank of Australia cut a lonely figure in a world where central banks are falling over each other to raise interest rates.

The policy-making boards of the RBA and the United States Federal Reserve were both meeting on Tuesday. The RBA announces its decision at 9.30 AEDT on Wednesday, just over three hours after the Fed announcement.

But while the Fed is seen as almost certain to raise its funds target rate for the 12th consecutive time and signal more to come, the RBA board is widely expected to leave its official cash rate unchanged for the eighth month in a row.

The RBA's inaction sets it apart. Canada and New Zealand have both raised rates in recent weeks. Markets are now convinced the European Central Bank will tighten before Christmas. Even the Bank of Japan, in raising its growth and inflation forecasts on Monday, signalled that its ultra-easy policy may soon be phased out.

In yield-driven foreign exchange markets, this is not a supportive environment for the Australian dollar, which fell from US75.23¢ to US74.66¢ overnight, weighed down by a strengthening US dollar and weaker commodity prices.

Buoyed by more strong US economic data expectations of further aggression from the Fed, the greenback accelerated to a fresh 25-month high against the Japanese yen and posted sharp gains versus the euro.

"We suspect that the recent US dollar strength largely reflects speculative investors not wishing to be short the greenback going into the Fed meeting overnight," analysts at National Australia Bank said in a morning briefing.

" With the Fed widely expected to raise interest rates by another 25 basis points to 4.0 per cent and signal further increases ahead, there is little, if any, downside risk to holding US dollars over coming days."

This sense is being reinforced by upbeat economic data. Overnight came news of a higher-than-expected reading for business activity in the US midwest and the biggest rise in US personal income since December 2004, helped by insurance payments for hurricane damage.

The buoyant economic readings combined with a fall in crude oil prices below $US60 a barrel and takeover activity to drive Wall Street higher - the S&P-500 gaining 0.7 per cent in its best two-day rally in more than two years. Bond yields were little changed, with traders reluctant to shift positions ahead of the Fed meeting.

With a rate hike on Wednesday morning and two more after that priced in, attention again will focus on the wording of the accompanying statement - namely whether the central bank continues to describe the level of interest rates as accommodative and whether it continues to pledge further "measured" increases.

"By year end the Fed will have to alter the outlook, as successive hikes make the policy accommodation mantra obsolete," ICAP economist Michael Thomas said. "The question is whether tonight's meeting will see the first step towards this end."

The consensus is that it might be too early for the Fed to tweak its statement, because it does not want the market to get ahead of itself and because recent economic developments have suggested no need for a shift.