Australian dollar rises to three-week high as traders pare RBA easing bets

[SINGAPORE] The Australian dollar climbed to a three- week high after the Reserve Bank of Australia gave no interest- rate guidance in its quarterly statement Friday and left its growth and inflation forecasts little changed.

The currency headed for a second weekly gain as traders reduced the probability of another rate cut this year by the nation's central bank to less than 50 percent and iron ore prices climbed. Options traders have become the least bearish on the Aussie since early April even after the RBA reduced its benchmark to a record-low Tuesday.

A gauge of the greenback was little changed from a loss last week before Friday's release of July labor statistics as traders assess the prospects for higher US borrowing costs.

"Given the RBA didn't repeat the risk to the economic adjustment process from an appreciating exchange rate in today's Statement of Monetary Policy, it probably makes it a touch bullish for the currency," Ray Attrill, co-head of foreign- exchange strategy at National Australia Bank in Sydney.

"There was no further downgrade to inflation forecast, no cuts to economic growth outlook and no signs of concern at the Australian dollar's appreciation since last September's lows."

The Aussie rose 0.3 per cent to 76.47 US cents as of 11.26am in Tokyo, after touching 76.54, the strongest level since July 15. It has appreciated by 0.7 per cent since July 29, adding to last week's 1.8 per cent advance.

LOWER ODDS

Futures are pricing in 49 per cent odds of an RBA rate reduction by December, compared with 86 per cent a week ago. Traders see a 54 per cent probability of easing by February, according to data compiled by Bloomberg. The price of iron ore, Australia's biggest export, has surged more than 20 per cent since early June.

"The RBA is unlikely to seriously consider a rate reduction for quite some time," said Sean Callow, a senior foreign- exchange strategist at Westpac Banking Corp in Sydney.

"Commodity prices are also providing support and investors may need to brace for the Australian currency to break past 77 US cents in the coming days." Options traders have reduced positions benefiting from a weaker currency.

The premium traders pay for one-month contracts giving the right to sell the Aussie over those to buy narrowed to 0.73 percentage point on Friday, the lowest on a closing basis since April 4. It was at an almost three-year high of 2.33 percentage points on June 16.

The pound rose 0.2 per cent to US$1.3129, following a 1.6 per cent drop Thursday after the Bank of England cut interest rates for the first time since 2009 and said it would buy corporate bonds to combat sluggish growth.

The Bloomberg Dollar Spot Index, which tracks the US currency against a basket of its major peers, has gained less than 0.1 per cent since July 29, when it completed a 1.7 per cent weekly decline.

BLOOMBERG