The Reserve Bank of Australia meets today to decide the next installment in monetary policy. A couple of financial indicators released yesterday seem to point the RBA towards further tightening, if not today then within the next month or so. Depending on subsequent data.
In anticipation of further interest rate rises, the Australian dollar pushed even higher yesterday, trading well above USD$0.81. If the dollar manages to hold above this level it could create new ground for technical analysts, seeing as the AUD hasn't traded there for quite some time.
We find it hard to believe that the RBA will look to pre-empt pricing pressures by notching rates up by another 25 basis points, so it would come as no surprise if the Aussie eased off from these high levels somewhat until further economic data becomes available.
Martin Arnold, equities economist at Commonwealth Securities, told Reuters, "There is definitely caution ahead of the interest rate meeting tomorrow [today]. Once the outlook becomes clearer, people are going to adjust their thinking accordingly."
He went on to say, if the RBA "does as we think and keeps interest rates on hold, it's likely that the share market will get a boost from that."
After withstanding the pressure for the first half of yesterday's trade with just a minimal loss, once everyone returned from lunch the market went into a not-quite-nosedive, with the All Ordinaries finishing down by 1.2%.
The information that got the market so riled was the numbers on retail sales and home building approvals. The Australian Bureau of Statistics released data that showed retail sales had increased by 0.9% over the previous month. That in itself may not have been so bad, except that the market had only factored in a rise of 0.4%.
The double whammy came with the home building approvals numbers. Home approvals across the board were up by over 10%, while approvals for apartments increased by a staggering 31.5%. Who said the property market was dead?!
Robert Rennie, chief currency strategist at Westpac, told Reuters "I would be surprised if we do not push higher [Aussie dollar]. We were making the assumption that the RBA would raise rates this week and certainly today's data has made that an easier call to make."
Rennie continued, "But as long as we do get 25 basis points, and depending what the accompanying statement looks like, then I think it is certainly in the realms of possibility that we see 82 cents." Of course, the Australian market can feel as though it is left in no-man’s-land if there is no change in monetary policy as a statement is not released.
In those circumstances the market is forced to re-evaluate everything again, rather than having it spoon-fed on a plate US Federal Reserve style.
We recall early last year, Bell Commodities analyst Kevin McKay putting out a research document calling the Aussie dollar to reach parity with the greenback, or should that be the US lira? We don't recall what timeframe McKay had on his parity prediction, but maybe it isn't as far off as we may have thought.
CBA currency strategist Richard Grace is in the bull camp, "The ramifications are extremely supportive of the Aussie, we would expect the Australian dollar to continue to press-on toward $0.8150, with an eventual rise to $0.8250."
The oft-quoted 'carry trade' could very well find more supporters helping to compound the Aussie's rise. A 6.5% risk free interest rate isn't bad for starters, especially for those institutions borrowing at the Japanese Yen rate of below 1%. On top of that, there are plenty of attractive investment opportunities in the Australian resource sector and even – dare we say it – for those firms wanting to finance leveraged buyouts.
We note with interest the interest from private equity in buying the Ten Network. We wonder - without knowing - whether any of this is subject to funding from the 'carry trade’?
Kris Sayce
The Daily Reckoning Australia
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About the Author
Kris Sayce began his financial career in the City of London as a broker specializing in small cap stocks listed on London's Alternative Investment Market (AIM). At one of Australia's leading wealth management firms, Kris was a fully accredited adviser in Shares, Options and Warrants, and Foreign Exchange. Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. In late 2006, he joined the Melbourne team of the leading CFD provider in Australia.
