• Chinese interest rates spoil the push for parity.
• Predicting Australian, US central bankers is tougher than a Melbourne Cup.
• Economic data mixed globally.

There is a long list of countries that have undermined plans for an Australian dollar’s push for parity, whether it is the outer European countries such as Portugal and namely Greece, or even the Dubai debt crisis. This time the Aussie’s proximity to parity has been undermined by our largest trading partner, a country which has provided us with significant demand for our exports, China. Unlike the previous countries however, the policy that felled the Australian dollar was off the back of excessive growth, rather than lacklustre economic performance. The result of the Chinese unexpectedly hiking interest rates 25 basis points to slow the economic behemoth was that the Aussie came off close to two cents before recovering a cent against the Greenback. The Australian dollar did reach parity against the USD on Friday evening however only by a whisker and only for a minute. This week’s Chinese announcement saw the USD recover against the Aussie off the back of moderated risk appetite.

Will, they or won’t they, by how much and when – I’d rather have shot at picking a Melbourne Cup winner. Both Ben Bernanke and Glenn Stevens have highlighted this week that they are prepared to consider all the factors before enacting their often blunt macroeconomic policy. Ben Bernanke said last week that “nonconventional policies have costs and limitations that must be taken into account in judging whether and how aggressively they should be used”. Governor Stevens said of his own policy in the board minutes that “members concluded that interest rates would need to rise at some point if the economy evolved in line with the central scenario of gradual tightening in resource utilisation”. Bernanke acknowledged this week that “high unemployment is currently forecast to persist for some time” which is about as dovish as it gets. This means it’s highly likely that we’ll see the Fed engage in QE, largely as a mandate to ensure there isn’t disinflation and potentially deflation there. Clearly however, both Stevens and Bernanke are prepared to canter rather than sprint their respective policies across the line.

European economic data generally resembles a region on a gradual path back to prosperity while the UK data & Bank of England often provides for cause for concern. Across the Atlantic from the problems in the US, the BoE announced in minutes on Wednesday evening that they would maintain the current level of monetary policy stimulus in both maintaining overnight rates there at 0.5% and in maintaining the current level of quantitative easing at 200 billion pounds. The central bank’s refusal to expand policy stimulus had a muted impact on the AUDGBP as government bond interest rates, gilts, recovered while overnight lending rates remained low. UK budget cuts overnight will likely see the GBP weaken if they’re more extensive than estimated and ideally this could be the precursor for a sustained recovery in the UK moving forward.

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