Strong indications of upcoming interest rate cut in Oz | Mortgage restrictions will clear the way

In a sharp reversal of expectations, the strong signs from Down Under are that the authorities there are getting ready for a number of core interest rate cuts in the New Year. This is in contrast to the accepted wisdom up to as late as last week that the next move would be up, not down.

The Central Bank (Reserve Bank of Australia) is known to be concerned about the relatively high value of the Aussie dollar, in spite of considerable falls in recent times. The elevated level is a threat to exports, at a time when the balance of trade has been adversely affected by a serious deterioration in the price of hard commodities, most notably Iron Ore.

Recently, we highlighted the fact that yield differentials between Aussie government bonds and US treasuries were in decline. This means that the bond market was effectively pricing in the possibility of core interest rate reductions. Now Wespac, one of Australia’s big four banks and a respected Forex market participant, has come out with a prediction of a 1% rate cut within 12 months. In doing this it has changed its outlook through a full 180 degrees.

Mortgage restrictions will clear the way

One reason why the RBA has been reluctant to lower rates in the past has been its fear of a property bubble, particularly in the residential market. For a little while now, in spite of the known scepticism on the part of RBA governor Glenn Stevens about the efficacy of such measures, there has been talk of placing restrictions on property loans, the so-called macro-prudential policies that are already in place in both New Zealand and the UK. Now such restrictions are moving much closer to becoming reality.

News reports from Australia now have it that the lending regulatory agencies are taking steps that have the strong potential to be the forerunners of such restrictions. Given the other indicators of an interest rate cut in Australia, it looks like the powers-that-be are getting their ducks in line, to ensure that a rate cut or cuts will not further inflame the property market.

Yesterday we indicated that the Bank of England is getting ready for interest rate rises. As a difference in core interest rate trends is one of the most important determinants of currency exchange rates, it now looks like the GBPUAD cross might be a good candidate for a move up (see chart at top). Technically, this chart is already well biased to the upside. There is a series of higher lows, price is well above the 200 week Exponential Moving Average (EMA), is using it as support, and this indicator is itself sloping upward. A break through the next resistance, at the 1.92 level, would be significant.