Australian Dollar Up Late, Awaiting G-20 Outcome

                          Rates At 0517 GMT
                          Latest       Change
AUD/USD                   0.9833        +0.2%
AUD/JPY                   79.79         +0.2%
6.5% May, 2013            4.8975%       +0.03
4.5% Apr, 2020            5.1534%       +0.03
10-Yr Spread To U.S.      +262 bps      -2 bps
SFE Dec 3-Year Futures    95.04         -0.04
SFE Dec 10-Year Futures   94.82         -0.035  

Thin trade ahead of this weekend's meeting of finance ministers and central bankers from the Group of 20 industrial and developing nations in Korea capped gains in the Australian dollar in Asia on Friday as dealers wait for detail on the G-20's discussion on exchange rate valuations.

What resolution, if any, is reached at the meeting on a framework for currencies to deal with global imbalances will be of most interest to dealers, RBC Senior Strategist Sue Trinh said.

"Absent an enforcement mechanism or deadline on the process, however, credibility is somewhat limited," Trinh said.

A letter by U.S. Treasury Secretary Timothy Geithner--cited by Reuters--in which he made a renewed call for greater exchange rate flexibility hurt the U.S. dollar late in the session, boosting the Australian unit.

Outside of the G-20, the local currency is also waiting next week's crucial third quarter inflation numbers, which some analysts think could prompt renewed tightening by the Reserve Bank of Australia if core inflation breaches the central bank's 2%-3% target band on an annual basis, or a reading of 0.8% on quarter.

Economists peg a tipping point for the RBA at 0.7%.

"The (RBA) Board is clearly anxious to hike again, so if the 'tone' of global data is better through the next couple of weeks, this will be enough in itself to trigger a hike in November," TD Securities Strategist Roland Randall said.

"The Australian dollar is likely to remain north of US$0.9800 for the foreseeable future. Prospects for higher yields are but one tailwind pushing the Australian dollar stronger," he said.

At 0517 GMT, the Australian dollar traded at US$0.9833, up from US$0.9817 late Thursday, and traded at Y79.79 up from Y79.67.

For interest rate futures, the December three-year spot contract dipped four ticks while 10-years fell three and a half ticks in quite subdued trade. The inflation outlook will be key for bond price action, although dealers broadly expect prices to absorb a strong reading and subsequent build up in rate hike bets.

"A November tightening is a 50-50 call and we will assess the tone of global news flow and domestic data over the next two weeks, which is likely to determine whether the RBA moves or not," TD Securities said.

Still, the risk is a for big sell-off in bonds, a Sydney-based interest rates strategist said.

"(The) market is pricing a 40% chance (the RBA hikes rates at November meeting) but I'm suggesting it should be 70%-30% or even 80%-20% they hike. So, even if CPI matches expectations, there could be a decent sell off," the strategist said.

Source http://online.wsj.com/article/BT-CO-20101022-701245.html