Sydeny: The Australian dollar (A$) advanced on Wednesday on better risk appetite, while a jump in retail sales and a large stimulus plan at home saw investors scale back bets on how far interest rates here might ultimately fall.
By late afternoon, the Australian dollar rose to $0.6485 from Tuesday’s $0.6378, having advanced as far as $0.6525 after the data showed retail sales climbed by 3.8% in January.
It had fallen to a 10-week low of $0.6248 earlier this week as expectations of a big rate cut by the central bank (Reserve Bank of Australia) and extreme risk aversion forced investors to dump the currency.
But Asian shares extended gains on Wednesday, underpinning demand for high-yielding currencies and carry trades, with most currency investors now awaiting rate decisions by the Bank of England (BOE) and the European Central Bank (ECB) later in the day for cues. The BoE is expected to slash rates, while the ECB is expected to keep rates steady.
On Tuesday, the Reserve Bank of Australia (RBA) lowered rates by 100 basis points (bps) to a record low of 3.25%. The monetary easing followed a second fiscal stimulus package worth A$42 billion, as the government stepped up its fight to avert a recession this year.
Data on Wednesday showed the first stimulus package worth A$10.4 billion announced last October, the bulk of which flowed into consumer pockets in December, boosted retail sales.
The 3.8% jump in seasonally adjusted sales was the biggest in over eight years and far above median forecasts of a 1.4% increase. But home building approvals remained weak, highlighting the downside risks to economic growth.
Interbank futures, which on Tuesday were pricing in cuts to below 2% by May, had pulled back to around 2.25%.
The A$ extended gains against the yen, pulling away from recent three-month lows, helped by slight easing in risk aversion. It rose to 58.04yen from 57.19yen late here on Tuesday. It had fallen to 55.51yen earlier this week, not far from its record low of 55.11yen hit in October in 2008.
With risk appetite improving, demand for safe-haven government bonds eased. Aussie bond futures were also weighed down by heavy losses in US Treasury debt market, which was bracing for imminent massive supply.
Australian government also announced a huge increase in borrowings in the coming months as it financed a yawning budget deficit and new spending plans.
Three-year bond futures fell 0.080 points to 96.935, and 10-year bond futures fell 0.09 points to 95.71.