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20 May – AUSSIE CLAWS ITS WAY OFF 11-MONTH LOWS
The Australian dollar eked out some gains on Monday morning, having been hit hard in May by a resurgent US dollar and falling commodity prices.
Having slipped through parity last week, the AUD/USD pairing continued to lose ground throughout the week, emulating the wider moves seen in the commodity market.
A key event this week will be the release of the minutes of the most recent Reserve Bank of Australia (RBA) meeting, where the bank cut rates by 25 basis points to 2.75%; the first reduction in 2013 and a decision prompted by weaker economic data. Though we can expect further commentary on this decision, the bank is likely to keep fairly quiet on whether we will see further rate cuts. Australian growth is predicted to slow further this year, which may prompt another rate cut, but the RBA will no doubt prefer to await further developments.
The building story in 2013 is a strengthening of the US dollar. There is a growing expectation that the Federal Reserve will begin to ease back on its asset purchases during the year, as economic data improves. If this happens the US dollar will strengthen, but we could see a higher US dollar even if the Fed opts to leave policy unchanged. The general trend of improving US economic data remains intact, which is likely to result in investors switching back to the US dollar and treasury bonds, even if there is no alteration in US monetary policy.
One element that remains in the Aussie’s favour is China. Although their close relationship can be a problem for the Aussie when data weakens, for now the story is one of Chinese strength. Despite all expectations to the contrary, growth from the world’s second-largest economy has remained very strong, avoiding the feared ‘hard landing’ (where GDP growth dips below 6%).
At the moment the trend is down, but the $0.96 level – a low from June 2012 and November 2011 – will be a key one to watch. This area has seen significant rallies in the past, so shorts should be wary. Should the level fail, however, then the next target would be the October 2011 lows around $0.94. Chris Beauchamp, London
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