Gold and oil prices are testing the $900 and $90 respectively after the dollar extended its rebound despite the decline in payrolls. While the December payrolls and unemployment rate were both revised favourably, the dollar rebound was partly attributed to sharp losses in sterling and position squaring in the euro. Tonights Reserve Bank of Australia interest rate decision (10.30 pm EST) is widely expected to lift rates to a 12-year high of 7.00% from 6.75%. The Aussie is also fuelled by Chinalcos $14.5 takeover bid for Rio Tinto, seeking to destabilize BHPs offer. Both developments are pushing the Aussie to 3-month highs vs the EUR and USD. The Aussie is testing 11-year highs against the British pound whose interest rates are expected to be cut this Thursday to 5.25% from 5.50%. We continue to favour AUDGBP as our top plays of 2008, which is up 3.8% YTD.

Risk appetite is in a tug of war between M&A announcements on one side and the threat of downgrades in the bond insurers on the other. Economic data will take a step back to the central bank decisions from the Australia, UK and ECB, with the latter possibly propping the euro on Thursday via another hawkish press conference. The question now is whether last weeks 5% rebound in the S&P 500 fits in the definition of a dead cat bounce amid the threat of further corporate warnings and downgrades from the credit rating agencies.

The 10 am EST release of US factor orders is expected up 2.4% in Dec from 1.5%, which would be another positive for US manufacturing following Fridays recovery in the ISM above 50.

Aussie Boosted Ahead of Rate Hike

The RBA is expected to raise rates to a 12-year high of 7.00% from 6.75% as part of its campaign to bring inflation below 3.0%, which is well above the preferred 2% target. The Aussie is also fuelled by Chinalcos $14.5 takeover bid for Rio Tinto, seeking to destabilize BHPs offer for the company. Both developments are pushing the Aussie to 3-month highs vs the EUR and USD.

The 7.30 pm EST release of Dec retail sales is expected to show a slowdown to 0.6% from 0.8%, which may draw fresh bids on the retreat ahead of the RBA decision.

AUDUSD has broken the key resistance of 0.9060, eyeing the 0.91 figure. Australian interest rate announcements have moved the currency by as much as 40-50 pips in less than 5 minutes, which means the pair may push towards 0.9140. Another positive day in Asian stocks should further grease the wheels of the Aussie rally and may call up 0.9155. In the unlikely case that the RBA holds rates unchanged, we can see the pair falling to as low as 0.8940.

AUDJPY expected to test the previous low of 97.70, with key resistance looming at 98.20.