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.
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