RBA to determine Australian dollar direction - 06-11-07

The Australian dollar has tackled resistance levels above 0.92 over the past 24 hours, primarily reflecting a continued lack of US confidence, with a move to high around 0.9260.

Domestically, the main focus will be the Reserve Bank interest rate decision which is due early on Wednesday local time. Markets are still expecting a 0.25% rate increase to 6.75% and a hike would reinforce yield support, although the impact is likely to be measured given that an increase is fully priced in. The central bank will face a difficult decision as the near-term underlying inflation concerns will be offset by fears over a sharp slowdown in growth as tighter credit conditions bite. In this environment, there is a possibility that rates will be left on hold this month on fears that a further tightening could trigger a sharp downturn in growth.

The underlying credit risks will continue to restrict demand for the local currency, especially if global stock markets retreat again. There will be limited gains if there is an interest rate increase, although the net risks suggest that the currency is unlikely to make much headway with the threat of a sharp retreat if rates are not increased.

Tim Clayton
Investica Ltd
E-mail: tim.clayton@investica.co.uk
+44 (0) 1452 781001