Australian Dollar Rate Could Drop as China Tightens its Monetary Policy

February 21, 2011 - Written by John Cameron

STORY LINK Australian Dollar Rate Could Drop as China Tightens its Monetary Policy

The Aussie Dollar lost ground in late trading during Monday’s session as political unrest in Libya caused a flight to safety in world markets. Whilst uncertainty remains regarding the outcome of the Libyan popular uprising, a movement of funds away from risk-sensitive currencies including the Rand, Kiwi and Aussie Dollars looks likely.

The Australian Dollar has also been hurt by Friday’s decision by the Chinese authorities to further tighten their domestic monetary policy by increasing China’s Reserve Requirement Ratio, (RRR). The increase in the RRR to 19.50% means that Chinese Commercial Banks will have to lodge a higher percentage of their assets with the Central Bank, leaving less funding available for lending to Chinese businesses and individuals and further diminishing appetite for risk in global markets. Chinese policy-makers have expressed growing concerns over rising domestic prices in recent weeks and have raised their central bank lending rate twice since Christmas. In a further anti-inflationary measure, the Chinese Central Bank have acted to lower the Yuan’s parity rate with the US Dollar, leaving the Yuan trading at its highest level ever against the US Dollar. Monday’s Asian session saw Chinese authorities allow the Yuan to strengthen for the third straight trading session.

China is one of Australia’s major trading partners, so any slow-down in the expansion of the Chinese economy will hit the Australian Dollar harder than most currencies. This combined with the drop in appetite for risk which slower Chinese growth would precipitate, means that investors holding Australian Dollar denominated assets will be watching the actions of the Chinese authorities with some concern.

The Australian Dollar is trading at a key technical level against the US Dollar, with the AUD/USD wholesale rate currently standing at 1.0111. If risk sentiment continues to wane, then a significant break down through parity is possible. Investors should be wary of technical trading affecting the value of the Aussie during the remainder of the week, particularly in the absence of any Australian tier one data due for release until next week.

On a positive note, the price of a barrel of crude oil continues to trend upwards towards its highest level since September, 2008. However analysts question whether rising oil, which traditionally signals improving global risk sentiment, will be enough to offset the risk aversion caused by the Chinese and Libyan situations.

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Australian Dollar Forecasts Pound Australian Dollar Forecasts