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TBI: The Tightening Cycle Is About To Being Again, And It Will Start In Australia

Joe Weisenthal | Feb. 10, 2010, 3:20 PM

Last week Australia stunned the world when it decided to pause its series of interest rate hikes. With that single move, it seemed, the tightening cycle had come to a premature end.

Or maybe it was just a pause.

That's what analysts at Hong Kong-based Currency Options Hotline argue in a recent note:

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Last week, the Reserve Bank of
Australia (RBA) confounded economists'
forecasts -- including our own! -- by
holding short-term interest rates steady
at 3.75%.

This broke a run of 3 consecutive
quarter-point hikes going back to
October.

But in retrospect, it's clear that
the currency markets effectively
anticipated this decision. The Aussie
actually peaked in mid-January above
US$0.93, and has since fallen about 6.9%
to US$0.8673.

That said, the same factors that
have thus far led to 3 consecutive
quarter-point interest rate hikes since
October, still exist. For example ...

* The Australian economy is still
growing strongly.

* Consumer spending and employment
are rising sharply.

* Inflationary pressures continue to
intensify.

Because of this, we are pretty sure
RBA's decision represents only a pause
-- not an end -- to the rising interest
rate cycle.

On top of that, the Aussie's retreat
to date has left it sitting just above
major support near US$0.865. To us,
that suggests the A$'s temporary
pullback has probably run its course --
which means the next move is likely to
be back up.

http://www.businessinsider.com/the-tightening-cycle-is-about-to-being-again-and-it-will-start-in-australia-2010-2