Dollar Rallies Following Rates Decision

15.13 AEDT, Tuesday 5 March 2013

Dollar Rallies Following Rates Decision

By Ben Taylor (Sales Trader, CMC Markets)

As expected the RBA has decided to keep rates at 3%. While the decision came as no surprise the accompanying policy statement was what the market really wanted to pick apart.

Following the statement the Aussie dollar rallied to reflect the positive language of the international outlook, the expected growth in local private consumption spending and the prospect of a pickup in investment outside the resources sector next financial year.

Previous cuts have come on the back of benign inflation, soft labour markets and a strong currency. Our dollar seems to be reacting more in line with supply and demand fundamentals and inflation is now sitting within the medium term target.

If the Aussie dollar does prove disorderly and unemployment stubbornly rises the market can take comfort in the fact the RBA has signalled further scope to cut rates.

Today the Australian equity market has run higher after Vice Chairperson of the US Federal Reserve Janet Yellen gave no indication to confine the asset purchase program in her overnight address to the National Association for Business Economic Policy conference. The overnight address followed the weekend’s announcement from the Beijing central authorities to stabilise growth and inflation to avoid a bubble or bust scenario. The decision will tighten lending and increase taxes on Chinese second properties to help contain excessive property prices.

The Chinese move will no doubt slow down property development, and in turn raw material import demand from Australia, however after the initial sell off seen yesterday we have dismissed the details and continued on our upward trend.

Today’s retail sales results have also helped to cement the run higher today. The lift in confidence is flowing through to a rise of spending and in turn boosts further assurance that our market will continue higher. However with stocks rallying on PE expansion and sentiment rather than a pickup in company profits it’s hard to see how much further this up trend can last.

The recent volatility at these lofty levels is a result of investor nerves. While traders have reduced risk premiums for Europe up to this point, the latest round of PMI out of Europe can be seen as a forward indicator for greater concern especially in France. The near term result will most probably see the ECB cut its cash rate this Thursday.

Web: http://www.cmcmarkets.com/

ENDS

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