The Australian dollar recouped some of its losses on Monday after a report from China suggested authorities there were looking to diversify the country's foreign exchange reserves. The Aussie had fallen to $0.9190 after lower-than-forecast producer price index (PPI) data for the third quarter cooled some of strong expectations of a 50 basis point rate by the Reserve Bank of Australia (RBA) early next week.
But it recovered after an opinion piece in the Financial News, a paper published by China's central bank, said the US dollar should remain the principal currency in China's stockpile of foreign exchange reserves, but the share of the euro and the yen should increase.
"The PPI report came in a bit weaker than expected and some of the steep tightening that markets seem to have cooled," said Tony Bieber, foreign exchange analyst at Suncorp Bank. "The Aussie got a lift from the Chinese report which is pretty strong in language. It suggests the Chinese are looking to buy the euro, some of which is bound to spill over to the Aussie." The euro and Aussie are both seen as growth-linked currencies and often move in tandem.
The Aussie stood at was at $0.9235, off an earlier high of $0.9277 and lower than $0.9276 late on Friday. It had hit a 14-month high of $0.9330 last week. Chartists say resistance is seen around $0.9330 and then at $0.9485 while support lurks around $0.9190. The Aussie has been one of the best performing currencies among the actively traded ones, rising around 30 percent this year, as investors bet the RBA will raise interest rates faster than elsewhere and that a global economic recovery will boost commodity prices.
The US dollar has been hovering near 14-month lows on a basket of currencies, however, on earlier talk that other Asian central banks might move out of US dollar assets and on expectations that the Fed will lag behind most major central banks in lifting rates.
In Australia, implied cash rates, based on money market and swap rates, are fully pricing in a 25 basis point hike and factoring in a 25 percent chance the central bank will raise rates by 50 basis points on November 3. Over the next 12 months, investors are pricing in 215 basis points of rate hikes. Aussie eased to 84.77 yen, but stayed near a recent one-year high of 85.31. The Japanese currency was also a beneficiary of the Chinese media report.
Australian bond futures were mixed amid split views on whether the RBA will go for a 50 basis point hike or opt for the usual quarter-percentage point increase at its next meeting on November 3. All eyes are on the third-quarter consumer price index (CPI), due on Wednesday. The CPI numbers have become crucial for the monetary policy outlook since the RBA shifted its focus to inflation as its major concern.