Australian Dollar Outlook 10/31/2011

The Australian dollar has maintained its relative strength having surged past 1.0700 late last week after some of the measures agreed to at the EU summit calmed markets for the time being.

Australia: Although the financial markets know there still is a lot of hard work to do before the European debt crisis is behind us, markets are becalmed after the extreme volatility of the past weeks and months.

Equity markets in Europe and the United States took a breather on Friday evening after the strong rises on Thursday. The Dow ended up being up by only 0.2% to 12,231 while the S&P 500 and NASDAQ were basically unchanged. Major European indices fell slightly while gold was steady at US$1,743 an ounce and oil came slightly off after Japanese industrial production was slightly lower than expected. In the next few days, focus will return to some of the local data due for release here which begins today with private sector credit growth, housing prices, monthly inflation figures and the construction index figures for October. Wednesday sees building approvals and Thursday retail sales for September. Sandwiched in between this is the RBA's decision on interest rates due tomorrow afternoon (and some horse race) where most analysts predict a 0.25% cut in the cash rate to 4.50% after the better than expected inflation number last week. We are sceptical this will occur given the RBA's conservative stance toward interest rate policy in the past and believe they will keep their options open to lower rates if the local economy weakens.

Majors: In Europe, the markets generally ignored the continued lack of confidence in Italian government debt with yields again pushing above 6% but still trading at levels lower than their peak of 6.19% in August. Discussion continues between the EFSF and the Chinese about their role in assisting the EFSF. It is estimated that China and Japan have bought up to half of the EFSF bonds thus far. Any formal decision is expected to be a long ways off. The possibility of intervention by the Bank of Japan to stem the rise of the JPY against the USD which hovers near record levels still remains but we have seen little evidence of intervention thus far.

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