currencies strengthen on Australian central bank interest rate hike
cautious about recovery prospects, only sees gradual improvement
discussion on when to start raising interest rates
Dollar under pressure again
The US currency remains under downward pressure. EUR-USD is
now over 1.47 again; USDJPY around 89. The negative impact of last weekâ€™s
disappointing labour market report on the markets was only short-lived. Some commentators were
actually of the opinion that the job
losses were boosting equity markets and weighing on
the dollar, arguing that the weak labour
market is enabling the Fed to continue to maintain its
expansionary monetary policy.
As before, the forex market reacted very sensitively to
suggestions that the dollarâ€™s international standing might be jeopardized. At the beginning of the
week, it was rumoured that oil producers in the Middle East and importers in China and Japan were discussing the possibility of no longer factoring oil transactions in dollars. This
report intensified fears that members of the Gulf Cooperation Council, which are planning to introduce
a common currency in 2010, could loosen their currenciesâ€™ peg to the dollar.
Then, early on Tuesday morning, the Reserve Bank of Australia surprised financial market
players by raising interest rates from 3.00 to 3.25%. Australia is thus the first big advanced economy to increase
interest rates. The RBA said its decision was based on the global economic recovery.
Australia in particular is benefiting from the relatively
strong growth in the Far East. Unemployment had not risen as much as had been
feared, and inflation would not fall as far as had been expected. Furthermore,
the RBA pointed out that the housing market was picking up significantly, financing conditions had improved and
equity markets were firm.
The Australian dollar soared on the RBAâ€™s decision to
hike interest rates so early. AUD-USD
rose more than 4% to over 0.90, the highest level since
August 2008. Together with the Australian dollar, the â€ścommodity currenciesâ€ť â€“
the Canadian dollar, Brazilian real, New Zealand dollar, Norwegian krone and South African rand strengthened
too. A new gold price record gave the rand additional support: during the
course of the week, gold temporarily rose to $1061 per troy ounce.
Australiaâ€™s interest rate step is significant, as it â€śofficiallyâ€ť
heralds (or seems to be heralding) the upward movement in global interest
rates. Up to now, central banks in the industrialised countries had held the common view that, given the macroeconomic
risks, interest rate hikes were not an option. Market participants are now focusing their
attention on which countries will tighten the reins next. The development of interest rate spreads
is becoming more important again.
The ECB is not tipped to raise rates at the moment. The
introductory statement to Thursdayâ€™s
ECB governing meeting only shows a slight improvement to
the assessment of the macroeconomic situation. Up to now, the ECB had been expecting
a â€śvery gradualâ€ť recovery. ECB president Jean-Claude Trichet continued to use
thisphrase on several occasions. Now,
however, the official statement talks merely of a â€śgradual recoveryâ€ť. In September, inflation was seen as â€śremaining
subdued over the policy-relevant horizonâ€ť. Now the ECB is expecting inflation rates
to be â€śmoderately positiveâ€ť. However, the ECB is still expecting the recovery
to â€śremain rather unevenâ€ť. There was also no change in its assessment of low
inflationary pressures over the medium term, based on the development of money
supply and credit growth.
Mr Trichet was rather tight-lipped on the subject of
exchange rates. He more or less repeated what had been said in the G7
statement, i.e. that excessive volatility and disorderly movement in exchange rates
was detrimental. He added that the US authoritiesâ€™ support of a strong dollar
was extremely important. Mr Trichetâ€™s comments were thus somewhat more moderate
than in some press statements after the G20 summit in Pittsburgh and the Ecofin meeting in GĂ¶teborg.
Next week exchange rate movements are likely to depend
to some extent on whether the upbeat mood in equity markets continues as the
reporting season progresses. During the course of the week, the big US banks are publishing their third-quarter earnings, as
well as IT firms. The minutes of the FOMC meeting on 23 September will also be
in the spotlight. The latest comments of Fed representatives (particularly
regional Fed presidents) show that in the US, discussions about the right timing for tightening
monetary policy are underway. Fed Chairman Ben Bernanke said this week that the
Fed would have to raise interest rates at some point, in order to keep inflation
under control. It will be interesting to see whether this was discussed at
length at the Open Market Committee meeting.
Stephan Rieke +49 69 718-4114
Grabbe / Klaus NĂ¤fken
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