While most of the Western industrial world struggles with deflationary fears, Australia continues to worry about inflation. In tonight’s latest release on monetary policy, Reserve Bank of Australia (RBA) Governor Glenn Stevens states:
“If economic conditions evolve as the Board currently expects, it is likely that higher interest rates will be required, at some point, to ensure that inflation remains consistent with the medium-term target.”
These economic conditions are bolstered by China’s continued strong demand for Australia’s commodities and improving private (domestic) demand and business investment. Stevens notes that “those [commodities] most important to Australia remain very high.” Most encouraging for the average Australian citizen is that “…the large rise in Australia’s terms of trade…is now boosting national income very substantially.” Even better that Australia can export profitably along with a strong currency for buying imports on favorable terms.
The consensus forecast was for a hike in rates to 4.75%, but the RBA chose to hold them steady at 4.5%. Despite the likely prospect of higher rates to come, the currency markets sold the Australian dollar swiftly in quick trigger fashion. No telling how long the pullback continues, but given the continued strength of Australia’s economy and the country’s enviably high interest rates, pullbacks in the Australian dollar remain buying opportunities (especially against the U.S. dollar).
Be careful out there!
Full disclosure: long FXA, AUD/USD, AUD/JPY, and short GBP/AUD