Australian dollar boosted by resources rally

The dollar approached its highest level in a month today, supported by gains in key commodity prices and broad US dollar weakness.

The Australian dollar approached its highest level in a month today, supported by gains in key commodity prices and broad US dollar weakness on Friday.

A further 5.5 per cent surge in spot iron-ore prices to $US57.81 a tonne and solid gains in coal prices lifted some of the gloom weighing on the currency in recent weeks.

Financial markets are now pricing in a 50 per cent probability of an interest-rate cut by the Reserve Bank of Australia at its May 5 policy meeting. The lack of certainty has lent the Australian dollar some support, traders said.

All eyes will now turn to RBA Governor Glenn Stevens, who will speak early tomorrow to a wealth conference in Sydney.

Mr Stevens strongly asserted an easing bias at a speech in New York last week, telling Goldman Sachs that interest-rate cuts must remain on the table, and that the RBA had clearly expressed a willingness to cut rates if needed.

The RBA cut rates in February, its first in 18 months, citing concerns about the lack of an economic recovery. It recently pointed to a lack of an investment revival and said the Australian dollar needed to fall to support the economy.

“Given our ongoing expectation of a May RBA rate cut, we still see the Australian dollar as a sell on rallies into early May,” said Sean Callow, a senior currency strategist at Westpac.

The Australian dollar was trading at US78c at 5.05pm (AEST) today, compared with US77.77c late on Friday.

JPMorgan’s Australia chief economist Stephen Walters said he was sticking with his forecast the RBA would lower its cash rates to a record-low 2 per cent in May, despite last week’s first quarter consumer-price-index data failing to provide a “smoking gun”.

“Looked at another way, nor did the data provide excuses for the RBA not to cut,” Mr Walters said.

Concerns about slowing growth would likely dominate the decision to ease rates, he said.

“We think the fall in commodity prices, particularly iron ore, poses downside risks to the RBA’s medium-term growth projections, which are likely to be trimmed again in the May SoMP [statement of monetary policy]. This would be consistent with the RBA easing policy again,” he said.