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Yuan appreciation hopes may clinch Aussie rate hike

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littlekracker


Published April 6, 2010

Yuan appreciation hopes may clinch Aussie rate hike

A 25 basis-point rise to 4.25% looked near certain this week

(SYDNEY) A seeming thaw in US-Chinese relations could clinch the case for Australia's central bank to raise interest rates today by opening a window for Beijing to revalue the yuan.

The Reserve Bank of Australia will be encouraged by the fact that a major currency row between the major powers may have been averted.

US Treasury Secretary Timothy Geithner said at the weekend the government had decided to delay the release of a currency report which could have labelled China as a currency manipulator.

The potentially embarrassing report had been due for release on April 15, days ahead of a visit to Washington by Chinese President Hu Jintao for a nuclear security summit.

The United States is now expected to delay the report until after June, when a G-20 meeting is to take a place, thereby giving China room to loosen its effective yuan peg without appearing to cave in to Western pressure.

The currencies of economies which are big exporters to China, such as Australia, should benefit from such a move.

The Reserve Bank of Australia (RBA) will be encouraged by the fact that a major currency row between the major powers may have been averted, averting turmoil in world markets. That could well tip the balance in favour of another rate rise at the RBA's policy meeting today.

Based on domestic conditions alone, a hike by the RBA of 25 basis points to 4.25 per cent had seemed near certain this week as part of a move to return its cash rate to a 'normal' setting of 4.25 to 4.75 per cent.

A strong job market, coupled with a buoyant housing market, have stoked inflationary pressures, and the RBA will have also been encouraged by further signs of recovery in the global economy, including encouraging job numbers from the US.

But markets now look split on the chances of a rate rise after disappointingly soft retail sales data last week and after RBA governor Glenn Stevens made a TV appearance warning about the dangers of keeping rates too low for too long.

A Reuters poll of 19 economists showed only a 60 per cent chance of a rise and interbank futures contracts are pricing the chances of a hike even lower.

A weekend article in the Sydney Morning Herald attributed the uncertainty to a 'pause' call by hedge fund adviser Medley Global Advisers.

A major reason behind this uncertainty can be attributed to the markets, and the RBA's perceived fear of a trade war breaking out if Washington brands Beijing as a currency manipulator.

This threat has been removed, at least for now, and the odds of China reciprocating with a yuan revaluation within three months are pretty high.

Expectations of a yuan rise will see further inflows into Asian stocks and currencies and the boost in confidence will further spur economic growth in emerging Asian markets.

A 25 basis-point increase will see the Australian dollar break a resistance band in the US$0.9230-50 range and work its way to former resistance at US$0.9330. As the market is pretty long, we will then trade in US$0.9330-0.8990 range.

An unexpected 50 basis-point increase will see the Aussie test and in all probability break the November 2009 US$0.9405 peak.

An equally unexpected decision to hold off on a hike will confine Aussie to a boring, well worn US$0.9230-0.8990 band with a chance of a retest of the late February lows at US$0.8800. -- Reuters

Guest


Guest
A seeming thaw in US-Chinese relations could clinch the case for
Australia's central bank to raise interest rates today by opening a
window for Beijing to revalue the yuan.

That's cool!

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