Australian Dollar Outlook Clouded Ahead of RBA Rate Decision

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Australian Dollar Outlook Clouded Ahead of RBA Rate Decision

Fundamental Forecast for Australian Dollar: Neutral

All eyes are on the Reserve Bank of Australia in the week ahead, with traders facing conflicting cues about the likelihood of another interest rate cut. Two weeks ago, RBA Governor Glenn Stevens appeared to play down the need for further easing, saying, “good deal of stimulus [is already] in the pipeline”. Last week however, Deputy Governor Guy Debelle countered that the central bank may use rate cuts to counter Australian Dollar strength.

On the economic data front, the landscape has been little changed since February’s policy meeting. Australian fundamental news-flow has run at a broadly even keel relative to economists’ expectations according to data compiled by Citigroup. Data releases from China – Australia’s top trading partner and a decisive source of demand for the country’s pivotal mining sector – have likewise painted a picture of steady growth.

For their part, traders appear to be leaning against a rate hike this time around, with the priced-in probability of a 25bps reduction in the baseline lending rate down to 17 percent now compared with as much as 57 percent following February’s sit-down (according to Credit Suisse). One-year expectations still call for a dovish lean however, with investors baking in a further 25-50bps in further easing by this time in 2014.

On balance, this makes for a clouded landscape ahead of the rate decision, which seemingly assures little besides the likelihood of volatility in the announcement’s aftermath as traders scramble to reposition their portfolios. If Glenn Stevens and company opt to keep the benchmark lending rate at 3 percent as expected, the focus will shift to the policy statement and any clues that can be gleaned therein about where the RBA plans to steer from here.

Elsewhere on the docket, fourth-quarter GDP figures are set to show the economy added 0.6 percent in the three months through December 2012, marking a slight improvement from the 0.5 percent recorded in the prior period. January’s Trade Balance, Retail Sales and Building Approvals numbers are also on tap. -IS

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