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SYDNEY, Nov 20 AAP

November 20 2012, 6:07PM

The Australian dollar is higher on improved sentiment around fiscal challenges faced by the US and Europe.

At 1700 AEDT on Tuesday, the currency was trading at 104.14 US cents, up from Monday's close of 103.67 US cents.

It was trading at 84.63 Japanese yen, up from Monday's local close of 84.23 Japanese yen, and at 81.39 euro cents, up from 81.24 euro cents.

National Australia Bank (NAB) currency strategist Emma Lawson said the local currency had opened the day higher, on positive news on the global economy.

"There's not a lot going on today, and there was a generally positive tone from overseas markets overnight anyway," she said.

"That was on the back of expectation that the US would deal with its fiscal situation, and that Greece would get its funding.

"Equity markets are also positive across the region, so that's slightly positive for the Australian dollar."

The fiscal cliff - a series of tax rises and spending cuts which are due to start in the new year - is a major challenge for the US economy, but recent comments from president Barack Obama suggested that efforts to resolve the situation were going well.

Ms Lawson said the local currency had fallen slightly after the release of minutes from the Reserve Bank of Australia (RBA)'s November 6 meeting, which had hinted at the possibility of future rate cuts.

However, the dollar bounced back later on.

Meanwhile, Australian bond prices were weaker after the RBA minutes.

At 1630 AEDT on Tuesday, the December 10-year bond futures contract was at 96.920 (implying a yield of 3.080 per cent), down from 96.990 (3.010 per cent) at Monday's local close.

The December three-year bond futures contract was trading at 97.400 (2.600 per cent), down from 97.460 (2.540 per cent).

CMC markets chief market strategist Michael McCarthy said the fall in prices was not unexpected, given the more optimistic language used by the RBA.

"While the board said they felt the need for further accommodation in the next few months, they pointed to several factors that had shifted," he said.

"Firstly their view on the international situation was more pro-growth than it has been in the past, suggesting that both China and the US are stable and growing.

"They pointed to a surprise in the higher reading on inflation. We knew they were going to look through the effects of the carbon tax - so they're clearly saying that in spite of that one off impact, the core inflation rate is still of concern."

Mr McCarthy said the RBA had also noted that previous rate cuts were starting to affect the economy, and that it wanted to wait and see if further impact would be felt.

By Caroline Smith