China decided to raise its one-year lending rate by a quarter percentage point in response to increasing inflation in the Chinese economy, which could fall victim to overheating if inflation – hovering around 3%, well above the 1.1-1.2% rate in the U.S.
This move hurt the Aussie because Australia’s economy relies heavily on the export of commodities. Investors and analysts predict that the increase in the lending rate will discourage expansion within China, which in turn diminishes demand for imported commodities. As a result, investors fled the Aussie to safer currencies.
Realtime forex trading today so far has witnessed the Aussie dropping 2.08% against the dollar, to 0.9688. This comes after the Aussie breached parity briefly against the dollar last week, and signals a significant drop off from last week’s highs.
The Aussie fared slightly better against the euro, falling only 0.64% to 1.4177 after going back and forth with the euro for most of the past week. The Aussie is on track to still close well below last week’s close of 1.4100 in EUR/AUD.
China is one of Australia’s most important trading partners. In the 2009 fiscal year, trade between the two countries was worth an estimated A$86 billion, and is predicted to climb to over A$100 billion by the end of FY2010. This growth, though, could be stunted as a lower demand for commodities with Chinese businesses interferes with sustained export levels from Australia.
No major forex news is pending this week from Australia, which has recently been discussed whether or not it should change its interest rate. So far, the Reserve Bank of Australia has declined to raise interest rates from the current 4.5% status, but with another meeting scheduled for November 2nd, and a consumer product index report for the quarter due out on October 27th, that could change.
Roland Randall, a forex strategist with TD Securities, rates the chances of a rate hike as 50% in November. He also characterizes the RBA as being “anxious” to raise rates.
The latest news coming from China could possibly factor into that decision, and more than likely means that the RBA will reevaluate its near-term growth prospects for the Australian economy in light of the latest realtime forex news.