The Tightening Cycle Is About To Begin Again, And It Will Start In Australia

australia, sydney, ap photo

Last week Australia stunned the world when it decided to pause its series of interest rate hikes. With that single move, it seemed, the tightening cycle had come to a premature end.

Or maybe it was just a pause.

That’s what analysts at Hong Kong-based Currency Options Hotline argue in a recent note:

——

   Last week, the Reserve Bank of
Australia (RBA) confounded economists’
forecasts — including our own! — by
holding short-term interest rates steady
at 3.75%.

   This broke a run of 3 consecutive
quarter-point hikes going back to
October.

   But in retrospect, it’s clear that
the currency markets effectively
anticipated this decision.  The Aussie
actually peaked in mid-January above
US$0.93, and has since fallen about 6.9%
to US$0.8673.

   That said, the same factors that
have thus far led to 3 consecutive
quarter-point interest rate hikes since
October, still exist.  For example …

   * The Australian economy is still
     growing strongly.

   * Consumer spending and employment
     are rising sharply.

   * Inflationary pressures continue to
     intensify.

   Because of this, we are pretty sure
RBA’s decision represents only a pause
— not an end — to the rising interest
rate cycle.

   On top of that, the Aussie’s retreat
to date has left it sitting just above
major support near US$0.865.  To us,
that suggests the A$’s temporary
pullback has probably run its course —
which means the next move is likely to
be back up.

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