Aussie Strengthens on Rate Outlook, Possible BOJ Intervention

Australia’s dollar rose the most since September after the Reserve Bank increased inflation forecasts and said higher interest rates may be needed “at some point.”

“The statement reads a bit hawkish relative to what the market had priced in, and the RBA’s confidence could also provide a boost to risk appetite,” said Todd Elmer, head of Group of 10 currency strategy for Asia ex-Japan at Citigroup Inc. in Singapore. “It’s a clear Aussie positive.”

The Aussie also snapped a six-day decline against the yen on speculation Japanese policy makers will act to weaken their currency after it rose against all its major counterparts this week. New Zealand’s dollar gained as traders bet its slump over the past four days was excessive. The South Pacific currencies also rallied as the U.S. payrolls report showed employers added more jobs in April than economists forecast, boosting demand for higher-yielding assets.

Australia’s dollar rose 1.9 percent to $1.0784 at 10:46 a.m. in New York, from $1.0579 yesterday. The currency gained as much as 2.1 percent, the most on an intraday basis since Sept 1. The Aussie climbed 2.6 percent to 86.91 yen. New Zealand’s dollar gained 1.6 percent to 79.65 U.S. cents and appreciated 2.3 percent to 64.27 yen.

The RBA raised its forecast for consumer-price gains this year to 3.25 percent from a previous prediction of 3 percent in its quarterly monetary-policy statement released today in Sydney. The central bank kept its growth forecast unchanged from February at 4.25 percent.

‘Further Tightening’

The outlook “suggests that further tightening of monetary policy is likely to be required at some point for inflation to remain consistent” with a goal of 2 to 3 percent in the medium term, the central bank said.

U.S. payrolls increased by 244,000 workers in April, the biggest gain since May 2010, the Labor Department reported today. The jobless rate unexpectedly rose to 9 percent in the first increase since November.

Benchmark interest rates are 4.75 percent in Australia and 2.5 percent in New Zealand, compared with as low as zero in the U.S. and Japan.

Australia’s central bank will increase its cash target by 38 basis points, or 0.38 percentage point, over the next 12 months, up from a forecast of 29 basis points yesterday, according to a Credit Suisse Group AG index based on swaps.

Investors should buy the Australian dollar against the euro after European Central Bank policy makers curbed yesterday expectations for an interest-rate increase next month, Citigroup’s Elmer said.

From the RBA “there’s really not much concern on the exchange rate,” Elmer said. “They are simply stating that it will help to control inflation, which suggests they’re not going to oppose further appreciation.”

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