AUD/JPY: Aussie Rises as RBA Likely to Keep Rates Unchanged

Despite soft economic data, expectations that the Reserve Bank of Australia will keep interest rates unchanged in its first policy meeting this year are deemed to lift the Australian dollar today. Analysts say that an improved global outlook is likely to hold off the central bank from slashing rates again. Further evidence that the Chinese economy is gaining traction emerged over the weekend after the vast services sector expanded in January.

Australians expecting for another interest rate cut are presumed to wait a bit longer. The RBA is widely believed to keep its finger off the rates trigger when it meets tomorrow amid encouraging signs in the US and Chinese economies. Even with weak economic data adding pressure on the RBA, forecasts of a cut have fallen to their lowest level in months. Credit Suisse data showed that the financial markets are pricing in a slim 22 percent chance of a cut tomorrow. The central bank last cut its cash rate in December, putting the cash rate at 3 percent.

Indeed, data in recent days from China and the US have been rather encouraging. HSBC’s Purchasing Managers’ Index has shown that the Chinese manufacturing sector improved, with the index rising to 52.3 points in January from 51.5 in December. Over the weekend, the National Bureau of Statistics and the China Federation of Logistics and Purchasing reported that China’s services industries grew at their fastest pace since August on strong gains in retailing and construction activity. The Non-Manufacturing PMI rose to 56.2 points in January from 56.1 points. With the data, analysts say that a mild growth rebound in the world’s second largest economy appears on track, with estimates suggesting the economy will grow by around 8.1 percent in the first quarter after a 7.9 percent expansion in Q4 of 2012.

Meanwhile, jobs growth in the US maintained its steady pace in January, adding to signs that the US economy is also on a recovery track despite shrinking in the fourth quarter. Better readings on construction spending, manufacturing and consumer sentiment also improved sentiment to send the Dow Jones industrial average over 14,000 for the first time since 2007. Aside from improving economic trends elsewhere, analysts say that the rise in commodity prices, especially for iron ore, are likely to sway the RBA from easing policy further tomorrow. Considering these, a long position is advised for the AUD/JPY trades today.

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