Photographer: Michael Dodge/Getty Images

Aussie Volatility Climbs to 11-Week High Before RBA Meeting

  • Swaps traders see about 50% chance of rate cut Tuesday
  • Gains in Chinese stocks give boost to the Australian currency

A gauge of volatility in Australia’s dollar climbed to the highest in almost 11 weeks before the central bank decides whether to cut interest rates on Tuesday.

The currency has declined against all its Group-of-10 peers in the past week after slower-than-expected inflation data boosted speculation the Reserve Bank of Australia will lower rates to spur growth. Twelve of 27 economists surveyed by Bloomberg predict a quarter percentage point cut, while the remainder forecast the central bank will stay on hold, extending a one-year hiatus. Swaps traders saw about 50 percent chance of a rate cut Tuesday, compared with less than 20 percent odds on April 26.

“Other than just the rate decision, there are a lot of questions regarding what the RBA will say,” said Prashant Newnaha, a rates strategist at TD Securities Inc. in Singapore. “Last week’s CPI miss has contributed to the rise in Aussie volatility. If the RBA cuts, the Aussie will come under considerable pressure.”

The Aussie’s one-month implied volatility, a measure used to price options, climbed to 13 percent as of 1:05 p.m. in Sydney on Tuesday, from 12.4 percent on April 28. The gauge is heading for its highest close since Feb. 17.

Australia’s dollar strengthened 0.5 percent to 77.07 U.S. cents after jumping 0.8 percent on Monday. The currency has appreciated 5.8 percent this year. A 1.7 percent increase in the Shanghai Composite Index supported the Aussie Tuesday. China is Australia’s biggest trading partner.

“Equity markets in China are up so that’s supporting risk sentiment,” said Roy Teo, a senior currency strategist at ABN Amro Bank NV in Singapore.

The central bank reiterated at its April 5 meeting that slow inflation would provide scope for further easing “should that be appropriate to lend support to demand.”

The so-called trimmed mean gauge of consumer prices slowed to 1.7 percent in the first quarter from a year earlier and the weighted median eased to 1.4 percent -- both record lows, according to data released April 27. The RBA targets annual inflation of between 2 percent and 3 percent on average.

Before it's here, it's on the Bloomberg Terminal.