Rate hike bolsters Aussie dollar

The Aussie/dollar rebounded strongly from the 0.7015 region — its lowest trade since September 2004 — and soared to 0.7795 in mid-May. Gains in commodity prices and new expectations that the RBA would hike rates supported the currency. At its May 3 meeting, the RBA did, in fact, hike rates by 0.25 basis points, bringing the cash rate target to 5.75 percent. The central bank pointed to increased inflationary risks from domestic and international trends when announcing the adjustment. On July 5, however, the RBA kept monetary policy steady.

After subsequently topping out at 0.7795 on May 11, the Aussie/dollar was hit with another round of steady selling, pressuring the currency to its late-June low of 0.7268. Analysts pointed to the “mini emerging market crisis” (see “From emerging to submerged,” Active Trader, October 2006) that plagued global markets during May and June as a factor in the Aussie/dollar sell off. During that time, global portfolio managers tugged assets out of emerging markets as a wave of risk aversion — and expectations of higher interest rates across the industrialized world — spread through the marketplace.

“[The Australian dollar/Swiss franc] tends to be an indicator of risk aversion,” Staskow says. Huge selling occurred in that cross rate in the late spring. Traders were going long the Swiss “as a safe haven and getting out of high-yield carry trades [such as the Aussie dollar],” Staskow says.