What’s bolstering the Aussie?

Since early October, the Australian dollar/U.S. dollar pair (AUD/USD) has moved from just above 0.7400 to around 0.7950 in early January.

Renewal of the Reserve Bank of Australia’s (RBA) tightening cycle was seen as a key supporting factor for the Aussie dollar in 2006. With short term official rates at 6.25 percent, some market watchers expect another hike at the Feb. 6 meeting, which would bump the rate up to 6.50 percent.

“With core inflation near the top end of the RBA inflation target, the RBA is likely to deliver a rate hike,” says Charmaine Buskas, economist at Moody’s Economy.com. “There is an expectation that yields will continue to favor the Aussie dollar. Positive interest- rate differentials and the draw of high yields should continue to underpin the Aussie dollar moving ahead.”

Broad-based U.S. dollar weakness has also fed the Aussie/dollar rally.

“The dollar index fell from a high of 92.63 at the end of 2005 to around 84 in late December,” notes Prakriti Sofat, strategist at the G-10 desk for Ideaglobal Ltd. in Singapore. (For more analysis of the dollar index’s down move, see “Dollar breakdown: Solid signal or red herring?” Currency Trader, December 2006.)

Also, strong gains in global commodities have been a bullish theme in recent years for the Aussie dollar. Recent strength in metals prices has supported the Australian dollar and will be an important driver going ahead.

“The direction of global commodity prices, particularly the base metals, will influence the direction of the Aussie against most of the majors in the coming months,” says Ruth Stroppiana, economist at Moody’s Economy.com.

A glance at a long-term chart shows the AUD/USD pair has stiff resistance at the 0.8000 region, which has capped gains in recent years.