Australian Dollar Could Rally for Test of 0.85 If RBA Leaves Rates at 3.00%, Signals Hawkish Bias

That Australian dollar made solid headway against the US dollar and Japanese yen on Monday, but fell against the rest of the majors as demand for the euro and British pound surged. The currency faces event risk overnight as the Reserve Bank of Australia (RBA) is anticipated to leave their cash rate target unchanged at 00:30 ET for the fourth straight month at 3.00 percent, and the Australian dollar may only respond to a biased monetary policy statement. As it stands, Credit Suisse Overnight Index Swaps (OIS) are pricing in 137 basis points worth of rate increases by the RBA over the next 12 months as economic data has shown slight improvements and RBA Governor Glenn Stevens issued somewhat hawkish comments, saying that they don't have to "wait until unemployment is peaking" before raising interest rates.

After the central bank’s last meeting, RBA Governor Glenn Stevens said that "the outlook for inflation allows some scope for further easing of monetary policy," and it will be very important to see if this line is repeated in tonight's policy statement. Indeed, if Stevens does not say it again, OIS will only shift to price in additional rate increases further down the line, which could send AUD/USD up for a test of the 9/22/08 high of 0.8518, and a break above that level opens the door to 0.9000. On the other hand, talk of potential rate cuts or dour assessments of growth or the financial markets could weigh on the currency pair.

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