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The decision to leave Australian’s interest rates unchanged left the Aussie vulnerable and hurt. A look at the decision, the impact for the Aussie and the larger impact for other currencies as the Non-Farm Payrolls are coming.

The decision

Although it wasn’t totally unexpected, the decision to leave the Australian Cash Rate at 3.75% and raising the rates to 4% was a blow to the Aussie. The instant reaction in AUD/USD was a fall of almost 150 pips -from 0.8927 to 0.8781.

Doubts about the rate hike existed all along the way. Q3 GDP was weaker than expected, and China’s tightening measures were felt instantly in Australia. On the other hand, most economic indicators are good, especially the important employment figures, which posted a neat surprise last month.

The last rate-related figure was Australian consumer price index. Q4 CPI rose by 0.5%, slightly better than expected, and giving the notion that a rate hike was secure.

But nothing is certain in forex, and Glenn Stevens decided to let the economy continue growing before fighting inflation, which it sees as controlled:

Inflation has, as expected, declined in underlying terms from its peak in 2008, helped by the fall in commodity prices at the end of 2008, a noticeable slowing in private”‘sector labour costs during 2009, the recent rise in the exchange rate and a period of slower growth in demand.   CPI inflation has risen somewhat recently as temporary factors that had been holding it down are now abating.   Inflation is expected to be consistent with the target in 2010.

The RBA hinted that it will be ready to raise the rates again, but not now.

AUD/USD technicals

Currently just under 0.88, the fall has currently stopped. The next support line for AUD/USD is 0.8735, which was December’s low. There’s still room to go down. Further below, 0.8567 was a support line for the Aussie on its way up.

If American Non-Farm Payrolls are stellar, the Aussie could go further down under: the area of 0.85 is very important for the pair. AUD/USD struggled to break 0.8477 on its way up, and took a rest at 0.8520 before continuing the journey.

Looking up, 0.8950 remains the immediate and major resistance line. Read more about the technical lines in the AUD/USD forecast.

Larger impact and Non-Farm Payrolls

But maybe US Non-Farm Payrolls and other indicators won’t be that good. Maybe the recovery is more fragile than anticipated earlier. The strongest Western economy, Australia, has doubts about the recovery.

This could lead to more dollar gains, but for different reasons: risk aversion. Since the Non-Farm Payrolls release on December 4th, the forex market went back to normal, with the risk factor being out of the equation. Is this trend reversing?

Now that Australia isn’t pushing forward, there can be more risk aversive behavior elsewhere, with the dollar gaining on fear. Another currency that benefits from this is the Japanese Yen, another “safe haven” currency that enjoys fear. The dollar-yen correlation might  sneak  back.

American Q4 Advance GDP was good, but the markets hesitated at first. Roubini dismissed it as dismal. A strong, positive and convincing Non-Farm Payrolls release is needed to depress the risk factor.

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