DY: Australia Holds Interest Rates, US Dollar Falls on Rebound in Risk Appetite
Australia’s central bank kept interest rates unchanged at 4.50 percent for the second month and reinforced a neutral policy bias going forward. The US Dollar fell as risk appetite firmed on bargain-hunting in Asian trade.
The Euro and the British Pound rose 0.3 and 0.4 percent respectively against the US Dollar as stocks advanced in overnight trade, sapping demand for the safety-linked greenback. The MSCI Asia Pacific regional benchmark equity index added 1.1 percent after prices fell to the lowest level since December 2008 relative to expected earnings, with cheaper valuations apparently spurring bargain-hunting. We remain flat EURUSD and GBPUSD.
The Reserve Bank of Australia kept interest rates unchanged at 4.50 percent as expected. RBA Governor Glenn Stevens said the current setting is “appropriate” with effective borrowing costs are “around their average levels” and underlying inflation “likely to be in the upper half of the target zone over the next year” despite a likely short-term move above 3 percent in the near term (an uptick chalked up to rising tobacco taxes and higher utility prices). Stevens added that the international economic landscape looks uncertain in the year ahead, with Europe hamstrung by “budgetary constraints…and the pressure on euro area banks” while Chinese economic growth is “starting to moderate”. Markets continue to bet on no changes in benchmark interest rates over the next 12 months according to a Credit Suisse gauge of priced-in expectations.
Separately, Australia’s Trade Balance surplus soared to A$1.7 billion in May – the highest 14 months – as exports soared 6 percent from the previous month, driven by a hefty 66 percent (A$772 million) increase in non-monetary gold shipments. Fittingly, spot gold prices overcame the December 2009 top to set a new record high in May and would rise further still in June. However, as we noted in our long-term gold forecast, the metal’s ten-year rally looks decidedly vulnerable, meaning its ability to boost Australian terms of trade is likely limited beyond the immediate future.
