Australian Dollar Outlook 11/01/2011

The Australian dollar has opened weaker this morning following yesterday's large Intervention by the Bank of Japan, while the markets expectations for a RBA interest rate cut latter today is also weighing on the AUD.

The market ended what was a volatile month with the Aussie opening around 1.0510 this morning compared with 1.0700 yesterday morning. The local unit shed almost two cents during our trading session yesterday as the Bank of Japan launched a new round of intervention to weaken the Yen. The BOJ sold an undisclosed amount of JPY sending the US dollar and euro climbing sharply against the currency. All eyes will be glued to screens today with the RBA interest rate announcement due at 2:30pm followed by the Melbourne Cup at 3:00PM. Markets are expecting a cut by 25bp to 4.50% to reflect a weaker global outlook and a slowdown in domestic inflation to 0.6% seen last week. Traders will look to the wording of the statement to see whether the RBA describes its policy as neutral or whether we could see start of an easing trend.

US stocks fell in the overnight session with the S&P 500 posting its biggest decline in almost a month, as renewed concerns European leaders will struggle to raise funds to contain the regions debt crisis. Greek Prime Minister George Papandreou announced he will put the European Union's new agreement for Greek finance to a referendum. The

S&P dropped 2.5% to 1253.00 erasing its 2011 gains. The index had snapped a five month retreat earlier in October rising 11%, the best month since 1991. European stocks were hard hit as the ECB was forced to purchase Spanish and Italian bonds to prevent higher yields rumoured to offset an unwinding of trades by the bankrupt MF Global holdings. The Dax fell 3.2% with Gold falling 1.6% to USD 1716.00 per ounce but still finished 6% higher for the month. The surge in the US dollar hit commodities with base metals generally weaker. Copper fell (-2.3%), Nickel (-0.6%), and Lead (-0.4%). Oil also closed 6% lower atg USD 109.2 per barrel as investors favoured the US dollar.

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