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What Is Up With Interest Rates Down Under?

AP

A few weeks ago, the Royal Bank of Australia's interest rate intentions seemed clear. Now, it's anyone's guess, and they're meeting on Tuesday.

Confused about what Australia's central bank is up to? You've got plenty of company.

As recently as July 12, there was widespread consensus that Australia would be cutting interest rates this year from the current 4.75%. But July 27 brought a surprisingly strong report on consumer price inflation, and the majority of experts are now looking for an interest rate hike to keep inflation in check.

Not at Westpac, though. Economists there are focused on anemic consumer spending and possible turmoil due to the ongoing problems in the euro zone, and they expect interest rate cuts, possibly to the tune of 100 basis points.

"We acknowledge there's a huge amount of investment in resource-rich locations, but high interest rates, a record exchange rate, weak demand and import penetration is too much for other sectors," said Huw McKay, a senior economist at Westpac. "We think they could use some interest rate relief."

So how do you trade the Aussie ahead of Tuesday's meeting, especially given how far it's come?

Maybe the advice of Timothy Riddell, head of FX research at ANZ, will help. He thinks the Aussie could continue to strengthen from current levels — and for the record, ANZ does expect a rate hike — but he argues that there are Asian currencies with brighter prospects.

Your call.

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