Bell FX Currency Outlook: The Australian Dollar is higher on improving global market sentiment despite yesterday's decision by the Reserve Bank of Australia (RBA) to cut rates by 0.25% to 3.00%, thereby equaling the record low of April 2009.

Australia: The rate cut was widely expected. Intense pressure is being applied to Australian Banks to deliver the full 0.25% cut and it looks more likely they will this month.

While the full effects of earlier rate cuts are yet to be seen, the ongoing strength of the AUD and the weak investment in the non-mining sectors were the driving factors behind the decision.

This strength in the AUD appears to be frustrating the RBA (the AUD is 0.5 US cents higher now than before the rate cut), and combined with the fiscal tightening taking place, it looks like the RBA will have more work to do in 2013 to boost activity, hence a further cut next year is very likely.

If the next couple of months show deterioration in the domestic economy, and the Q4 CPI is modest when released in late January, the pressure will be on the RBA to cut again when they next meet in February.

Global factors (steady to stronger sharemarkets) are also helping the AUD to continue to be strong. Today the markets will focus on the Australian GDP data.

An AAP survey of 13 economists showed the median expectation is for the Australian economy to have grown 0.6% in the September quarter, taking growth over the year to September to 3.1%.

This is significantly less than the 3.7% growth seen over the year to June. With a currency determined to stay strong, analysts are starting to call a return to the USD 1.0700 level.

Majors: Fiscal cliff negotiations made little progress, with President Obama rejecting the latest plan by the Republicans, worth US$2.2 trillion in new revenue and spending cuts.

The Obama administration said the House Republican plans 'did not go far enough' while the same plan drew criticism from the wings of the Republican party itself, indicating the stillwide gap between the various stakeholders, and supporting an underlying bid tone in the USD.

Oil prices fell overnight in light trade as weak demand and continuing US budget concerns weighed on prices. Spot gold fell sharply overnight as heavy selling by funds and option-related selling pressured prices below the 100-day moving average (a key technical level).

Base metals prices were mixed overnight and agricultural commodities prices were broadly weaker. The Bank of Canada left rates unchanged at 1.00% as unanimously expected by the market, and also maintained its stance on the outlook for future policy.
Economic Calendar
05 DEC AU 3Q GDP
CH HSBC Services PMI Nov
EU Retail Sales Oct
US ISM Non-Manufacturing Composite Nov

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