RISK aversion remained the dominant theme in Asia yesterday, with the Australian dollar finishing lower, but bonds were mixed ahead of an expected rate hike by the central bank today.
At the local close the dollar was trading at US88.33c, down US1.01c.
At its first monthly meeting of the year, the Reserve Bank of Australia is expected to raise rates by 25 basis points to 4 per cent, although most attention will be on the accompanying statement for guidance on what the next move will be.
Nervousness ahead of the RBA decision meant bond futures saw little action -- volumes were thin and there was little interest from offshore.
Although some expect the RBA to signal a pause in coming months, which would support bonds, its outlook would probably be ambiguous, a Sydney rates dealer at a global investment bank said.
The three-year March futures contract was last night two ticks higher at 95.17, while the 10 years were unchanged at 94.555.
Currency dealers are also squarely focused on the RBA outcome, though some point to US non-farm payrolls on Friday as a possible circuit breaker for the recent burst of risk aversion.
Strategists at National Australia Bank said the local unit was a clear buy around current levels.
"We continue to see falls in the Australian dollar against the US dollar below US90c as opportunities to purchase at a fundamentally cheap level. If US87.35c holds, this would provide a strong signal to buy," one said.
Barclays Capital FX strategist David Forrester said the Aussie was likely to appreciate.
"We continue to look for a 5.50 per cent cash rate by year end," he said.
"We expect this week's retail data to surprise to the upside."
Societe Generale strategist Patrick Bennett also tipped a firm outlook for the commodity currency, especially against other G7 currencies excluding the US dollar. "Australian fundamentals support medium-term Australian dollar outperformance," he said.
"While crosses may appear to lead the way lower due to liquidity, we are comfortable to expect other G7 currencies, excluding the US dollar, to underperform."
