Australian dollar set to jump if RBA holds rates

The Aussie dollar is poised to surge back to its highest levels in more than half a year if the RBA fails to deliver a rate cut.

The Australian dollar is poised to surge back to its highest levels in more than half a year if the country’s central bank fails to deliver a cut in interest rates next week, dashing the hopes of recovery for exporters that have battled an uncompetitive currency for close to a decade.

Currency strategists said the Aussie dollar would jump to around US85cfrom US80c now, if the Reserve Bank of Australia doesn’t act on the easing bias it has had in place for months.

At 5pm (AEST) today, the Australian dollar was trading at US79.68c, down from US80.07c late Wednesday.

The Reserve Bank of Australia cut interest rates for the first time in 18 months in February, responding to a slowdown in economic growth, but dashed hopes of a follow-up cut in March and April.

RBA governor Glenn Stevens told a conference in New York last week the question of further interest rate cuts should “be on the table,” saying the Australian dollar was likely to continue falling.

But belief in the RBA’s resolve to lower its cash rate target to a record low of 2 per cent from 2.25 per cent at Tuesday’s policy meeting has faded over recent weeks amid news of strong march employment data, and some recovery in the iron-ore price, which had languished at decade lows.

Growing doubt that the US Federal Reserve will raise interest rates this year has also weakened the U.S. dollar, giving the Australian dollar added momentum.

Financial markets currently put a 50 per cent chance of a cut at the policy meeting on Tuesday.

“If the RBA does not cut rates next week, it risks sending the Australian dollar as high as US85c,” said David Plank, macro strategist at Deutsche Bank, Australia.

To prevent a sharp appreciation of the Aussie in the event of no cut, the RBA will need to forcefully assert its easing bias again.

But Mr Plank said the market would reject that tactic by the RBA.

“It is going to be difficult for them to do that having not cut for three months in a row,” he said.

Richard Grace, chief currency strategist at CBA, said he saw the risk that Aussie dollar could rally toward US81.48c over the next week and then US83.04c if the RBA sits pat.

“A temporary lift in the Aussie dollar to such levels is certainly possible; particularly as large Aussie dollar short positions are unwound,” he said.

Still, the strength of the Australian dollar was likely to encourage the RBA to cut interest rates, said Bill Evans, chief economist at Westpac.

The rise of the Australian dollar would be viewed “quite dimly by the folks at the Reserve Bank,” Mr Evans said.

A small recovery in iron-ore prices has helped the Aussie dollar, but not to the extent that it justifies the Aussie back above US80c, he said.

“On face value that would appear to be a strong argument in favour of a cut,” Mr Evans said.