Chillin' out till it needs to be funded
The monthly back to back cuts announced by Reserve Bank of Austaralia came after a yera of keeping rates and the Aussie Dollar strong despite
suspect domestic growth as it did not like inflation crossing 2%. The Australian Economy wasn’t really hurt except for natural disaster and th global commodities cycle, the dependence on both still a cause for concern for the world’s only English speaking resource based Economy. Though not counted as part of the developed world, the Aussie was given a fair chance as SGD, CAD and CHF (Swiss Franc) bit the currency acceleration curve from 2009 to get more countries to hold the currency. Today however as the rates fell from 4.75% in Setember to 4.25% before Christmas holidays, Aussie’s worried that its imprtant customer China is not interested in picking up goods it does not need as it battles a production slowdown.
Further when the Chinese do come out of the production slump, as the likely bottom has already been found, they will be trying to reduce their commodities imports per their current development plans and if power shortages and higher labor costs continue. (see our series on China in Brazil)
RBA has obviously been affected by the recession bug, however. Fears of a European crisis continuing ahead of Friday’s summit pronouncements resolving the European crisis resulted in a 17 country downgrade watch issued by S&P in the early hours ahead of the RBA meeting. RBA now joins Brazil in cutting rates as the peak of the inflation cycle, as Australia could not afford the currency appreciation either.
While RBA sits on the conservative end the global and Asian currency and equity markets continue in the newly found Risk on phase, buying up equities, deals and finding fixed income offerings also to satisfy their targeted spreads RBA could be in a privileged position as per its own analysis as it is able to sit on rates above 4% and take in at least 3 more rate cuts without being disturbed about excessively low rates
RBA expects the rate cut to translate into lower home loan rates and higher spending on Christmas by families. However, banks that suffered
on the ASX when the rate cut was announced are unlikely to be able to pass on the rates as their healthy NIMs are in danger of being destroyed by the freezing of the Inter bank market globally, bank funding costs going up as European banks take money off the table and run off older holdings that cannot be sold
However the sudden move cut into Aussie profits even as the Dollar also continued its downward journey independently weakened by sales from the hot money trail. With its newly funded purchases including shoring up by Sovereigns, there are not many buyers for USD or AUD in the Risk on trading phase that the currency markets have entered.
The Aussie’s weakness will gratly benefit the domestic conomy thought he international trade will bring back fears of inflation running off It has already dipped below 1 earlier last week and went back from 1.03 levels to below 1.02 on the rate cut trades. Australians started the rate cuts in September of this year to regain lost growth momentum and would not mind falling below par to the Dollar as their import component on retail consumption is a sizable 20-25% even after government controls on import