RBA Rate Decision

The RBA meets tomorrow and it is widely expected to cut interest rates to 4.5% from 4.75%. This was signaled in the minutes of its last meeting a, thus if the Bank fails to do this it would shock the market.

A fundamental factor behind the shift to a dovish stance by the RBA is a weakening inflation outlook for Australia. The second is the uncertain global economic outlook caused by the European sovereign debt crisis.

In our opinion, the drop in the inflation data for Q3 provides enough scope for the RBA to cut rates tomorrow. The figures showed an increase of +0.6%m/m and 3.5%y/y, coming in-line with estimates. However, the trimmed mean figures and weighted mean figures, the inflation measure looked at by the RBA, both came in worse than expected (y/y) at 2.3% and 2.6% respectively, and the monthly underlying inflation figure, 0.3%, is the lowest figure we have seen since 1997.

Domestically, the Australian economy is experiencing mixed levels of growth. The mining sector is leading the way offsetting weakness in the domestic-focused sectors of the economy like retailing, manufacturing and finance. A large part of the downward impulses to inflation stems from the labor market, with recent data showing that it is softening. The unemployment rate is moving higher, however signs suggest that this may not persist and job vacancies are on the rise as benefits claimants are falling.

In conclusion, the decision tomorrow could come down to the offsetting factors of domestic inflation and the outlook for the global economy. As previously stated we believe the global economy is in a better position since the last meeting of the RBA, and although not perfect, the EU debt deal at least reduces the chance of a systemic crisis that could engulf Australia and its largest trading partners in Asia. So although the Bank may cut tomorrow, its outlook for further policy decisions is likely to be cautious and dependent on domestic and global economic outcomes in the coming months.

What can we expect from the Aussie tomorrow?

Intervention by the BOJ today brought AUDUSD down from around 1.0700 to below 1.0600. This is critical when analyzing the impact of tomorrow’s rate decision, as it pulled the Aussie off its highs and decreases the likelihood that the currency is/was over-bought following the risk rally last week. The Aussie could be pulled in two directions tomorrow: if the RBA cuts then it adds to lose global monetary conditions, which is good for growth and thus risky assets like the Aussie. However, it would also mean that the Aussie would lose some of its yield advantage especially against the US dollar.

In the current environment risk seems to be rallying on better growth prospects, however the longer term outlook for the Aussie is not clear-cut at this stage and is dependent on the outlook for global growth and the resolution to the sovereign debt crisis. Thus, it could be a volatile say for the Aussie, and FX traders need to return to data watching.

Источник: Forex.com

31.10.2011