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Forex Flash: RBA easing weighs upon Australian dollar - BTMU

FXstreet.com (Barcelona) - Lee Hardman, FX analyst at the Bank of Tokyo Mitsubishi UFJ notes that the Australian dollar has weakened overnight following the RBA´s unexpected decision to ease policy at today´s meeting, with AUD/USD and NZD/USD testing key support levels at 1.02 and 1.20 respectively.

He begins by noting that at today’s meeting, the RBA decided to lower its cash rate by 0.25 point to 2.75%. He writes, “The timing of the additional monetary easing has taken the market by surprise which had attached only a rough 50:50 probability prior to today’s meeting that a 0.25 point cut would be delivered today.” He adds that the increase in the Australian unemployment rate in March and the weaker than expected Q1 inflation report prompted the RBA to ease monetary policy to encourage “sustainable growth”. Further, the RBA also left the door open to further easing ahead by reiterating that “the inflation outlook would afford scope to ease further, should that be necessary to support demand. At today’s meeting the Board decided to use some of that scope”.

He continues to comment that the RBA also reiterated that the Australian dollar remains historically high which is “unusual” given the decline in export prices and interest rates. He writes, “We still anticipate that the RBA will lower its cash rate to 2.50% by the end of 2013 which will likely weigh only modestly upon the Australian dollar. In Japan investors are returning from Golden week which has seen the Japanese equity market post strong catch up gains today.” He continues to notes that the yen remains weaker following the stronger than expected US employment report for April with USD/JPY trading just back below the psychologically important 100.00- resistance level. He notes that the report revealed that employment growth in Q1 was stronger than initially reported averaging 206k/month before slowing to an average of 152k/month in March and April. It is consistent with the US economy losing some upward momentum in Q2 as the sequestration spending cuts bite, although from a stronger starting point which supports our view that the slowdown is likely to prove only temporary and modest. The drop in the unemployment rate to 7.5% was another US dollar supportive factor keeping alive investor expectations that the Fed may begin to ease the pace of QE3 later this year.

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