Friday, March 20, 2015

Aussie rate cuts ‘a virtual certainty’ | Central bank is happy with performance

The Australian monetary authorities seem to have been depending on the US Federal Reserve to, once again, come to their aid in the matter of what is perceived by the Reserve Bank of Australia (RBA) to be an overvalued Australian dollar. The hope seems to have been that the Fed would signal imminent rises in core interest rates in the US, which would have the effect of depressing the AUDUSD pair by strengthening the Greenback. This is needed Down Under in order to assist in the transition from a mining based economy, which is now rapidly fading into the twilight, and one that is more dependent on internal consumption. The problem for the Aussies is that any effort by the RBA to reduce the currency by themselves lowering rates will exacerbate an already very frothy housing market, especially in cities like Sydney.  A property bubble is the last thing they want or need.

Now, a story in the “Australian Business Review” has it that, given the failure of the US FOMC to move in the direction of rate increases in its monetary policy statement of last Wednesday, the Australians are forced to act. According to the story, money markets there are pricing in a 100% chance of a cut in the Cash Rate in April or May.

Central bank is happy with performance

Meanwhile, the governor of the RBA, Glenn Stevens, seems to be pretty sanguine about the whole monetary situation. In a recent speech, he gave his organisation a pat in the back, saying that Oz has so far avoided a major upswing in inflation during the mining boom years, and a major crash in its aftermath. Presumably with RBA assistance.

His problem is, of course, that they are not out of the woods yet. The Aussie dollar is indeed in a downtrend (see chart at top) but, given the overriding importance of interest rate differential expectations in its valuation, it would take very little to push it to the upside once again. That is, unless the RBA acts in the way the market expects. It does not always do so.

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