RBA Governor provided generally upbeat testimony in front of the Australian Parliament spurring a rally in AUD/USD and surprising the currency market which expected him to assume a more dovish stance given the recent slowdown in the economy. “Overall,” Mr. Stevens noted, “there is a good deal of interest rate stimulus in the pipeline. At its meeting earlier this month the board judged that it was sensible to allow it time to do its work.”

In relation to China Mr. Stevens also sounded relatively sanguine. “The medium-term outlook for China is for a less hectic pace of growth than we saw on average over the past decade,” he said, but added that because the Chinese economy is now so much bigger, even less rapid growth is of global significance and important to Australia.

Many market analysts however have questioned the assumption that future Chinese growth may not necessarily translate into additional demand for Australian products if China rebalances it economy away from investment and production and more towards consumption and services. Under such conditions, the Australian economy with its high exchange rate may prove uncompetitive creating further problems in growth.

Nevertheless, Mr. Steven’s upbeat tone and suggestion that the series of interest rate cuts have yet to have full impact on Australian economic demand, surprised the market because it indicated that the RBA may be more cautious in loosening monetary policy further. Many analysts have called for an additional 50 basis points in cuts in 2013, but Mr. Steven’s testimony suggested that the RBA was in no hurry to initiate such policy in the near term.

The Aussie bounced off its year to date lows as result, rising to a high of 1.0324 in afternoon Asian session trade as shorts covered their bets. With no major data in North America today the unit is likely to maintain its gains and it looks to have put in near term bottom for now. However the Aussie remains vulnerable to any further negative economic news from Down Under and could resume its downtrend if the data does not support the RBA’s upbeat view.

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