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AUD/USD: Australian dollar rebounds despite Kent warning

H.S. Borji
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The Australian dollar rebounded against its US counterpart Thursday, retracing sharp losses in the Asian session that immediately followed comments from Reserve Bank of Australia Assistant Governor Christopher Kent.

The AUDUSD bounced from an intraday low of 0.8670. The pair would subsequently consolidate at 0.8741, advancing 0.34 percent. Initial support is likely found at 0.8673 and resistance at 0.8755.

Australia’s economy is expected to gather momentum in 2016 as the value of the Australian dollar depreciates in response to rising US interest rates, RBA Assistant Governor Christopher Kent said today in a speech in Sydney.

The Australian dollar, “which remains above most estimates of its fundamental value, particularly given the substantial declines in commodity prices,” is forecast to decline in the long-term. In the interim, economic growth will likely remain below trend, Kent added.

Kent explained that in addition to an overvalued local currency, a slowdown in mining investment and austere budgetary reforms were responsible for the slowdown in the economy.

“The near-term weakness reflects a combination of three forces: a sharper decline in mining investment over the coming quarters than seen to date; the effects of the still high level of the exchange rate; and ongoing fiscal consolidation at state and federal levels,” Kent said.

The central bank assistant governor did not rule out the possibility of intervening in the currency markets, echoing the RBA’s long-standing commitment to doing so if necessary. According to the RBA, the Aussie remains high by historical standards, even when factoring in its recent declines.

The Aussie has averaged about 93 US cents over the past seven years, according to Bloomberg News. The currency surged past $1.10 US in 2011, a record high.

The RBA, which has held interest rates at a rock bottom low of 2.5 percent for 15 consecutive months, is carving out a period of stability to stimulate the domestic economy. Although the central banking authority is not expected to adjust interest rates any time soon, the next move will probably be a rate hike rather than another cut. The RBA cut its overnight rate by 2.25 percentage points between 2011 and 2013.

In economic data, Australian inflation expectations rose in November to 4.1 percent from 3.4 percent, the Melbourne Institute reported today. The monthly report gauges households’ expected rate of consumer price changes in the next 12 months.

Separately, China posted disappointing industrial production and retail sales figures Thursday, raising concerns the world’s second largest economy was losing steam.

Industrial production rose 7.7 percent in the 12 months through October, following an 8 percent year-on-year gain in September, the government reported today. Economists forecast an increase of 8 percent.

Meanwhile, retail sales increased at an annual rate of 11.5 percent in October, down from 11.6 percent a month before and undershooting estimates calling for the same.

The reports confirm China’s economy is cooling and that Beijing may not realize its 7.5 percent growth target this year. China’s economy grew 7.3 percent in the third quarter, the weakest rate since early 2009.

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