Australian interest rates are currently at 4.25% making the carry trade attractive to investors who can only achieve interest rates of 0.5% in the UK, and even less in the United States and Japan.
Most were expecting the Reserve Bank of Australia (RBA) to cut interest rates last week by at least 25 basis points therefore reducing the yield on the carry trade which should in theory weaken the Australian Dollar. Interest rates were left on hold which sent the Australian Dollar soaring to new highs early in the week.
The market will now look towards Australia’s employment data which is due on Thursday for clues of future interest rate announcements. Most sectors apart from mining are under increasing pressure and any signs of further strain may force the RBA to loosen policy at their next meeting.
Slowing growth in China may offer some relief for long term Australian Dollar buyers who should reduce part of their exposure if we see A$1.6000, however the 1985 low of A$1.3597 is still a risk particularly if the employment data is encouraging.
Thanks to Halofinancial who provided this commentry