Markets: News  

Australian dollar gains ahead of RBA meeting

NEW YORK (MarketWatch) -- The Australian dollar eked out modest gains Monday ahead of a Reserve Bank of Australia meeting that many analysts expect will bring no change to its benchmark interest rate.

The Australian dollar (AUDUSD) traded 0.4% higher in North American afternoon trading to $1.0253.

Australia's central bank will likely maintain its benchmark rate at 3.50% when it meets Tuesday, reflecting improved sentiment in Europe.

Such a move would interrupt the institution's recent rate-cutting cycle. The bank lowered interest rates by 50 basis points in May and by 25 basis points in June, responding to a slowdown in the global economy and the ongoing debt crisis in the euro zone.

"A sudden sharp deterioration in the European outlook may force a cut, but our central case is that rates remain steady at 3.5%," Barclays said in a note to clients Monday. Current market pricing is indicating only a 22% chance for a 25-basis-point cut, down from almost 90% earlier in June, according to Barclays.

A Dow Jones Newswires survey of 15 economists on Friday showed that all expect no change in the interest rate this month.

Data following the rate cut in June showed that unemployment remains low and gross domestic product is back to growing at an above-trend rate, Barclays said.

While the RBA decision may be the headline event this week, it won't be the Australian dollar's primary mover, according to analysts.

"The near-term trajectory of the Aussie dollar is going to be driven much more by the evolution of global economic data and the perception of tail risk emanating from Europe rather than the outcome of the RBA decision," said Andrew Cox, currency strategist for Citigroup Inc.

The Aussie edged higher on Friday following last week's European Union summit that saw leaders agreeing to concrete steps to fix the region's debt issues.

In contrast to the RBA, the European Central Bank is expected to cut its benchmark rate by 25 basis points on Thursday.

"We think that more conventional and unconventional easing measures by the ECB later this week could add to the cyclical headwinds for the single currency across the board," wrote Valentin Marinov, head of G10 currency strategy at Citigroup, in a note to clients. The euro could head lower against the Aussie, "especially if the RBA leaves rates unchanged and signals no imminent cuts ahead tonight," he said.