Morning all! Yesterday saw the RBA lower rates, more on that below, and the Aussie rallied. The thing is, that given that the market was 100% convinced of a cut that who was left to sell the dollar when it did happen? Also, the wording of the statement hinted at no more after this, whilst the market was expecting another cut later this year. So, with that hint and no more sellers, the Aussie ran higher.
Overnight the stock markets saw some profit taking off their highs despite some great figures overnight. This saw some sideways action in the US$ as other currencies moved against it.
Adam Carr here says it all better than I could, a good read see the link below.
So what happened yesterday? There is a is a growing sense that the RBA board has gone too far. And it has, especially as it looks like the political motivations of the board are too obvious. The statement overall was unchanged, which means that global growth is expected to pick up, Australian growth is expected to be just below trend and inflation contained. Inflation currently is at the mid-point of the target.
This is all unchanged from last month, and of course makes no case to have the lowest rates on records. Indeed two hours prior to the rate decision we learned that house prices surged in the quarter and of course the economy more broadly has deteriorated quite sharply since the RBA cut rates – nearly two years on – with a huge chunk of that deterioration in consumer spending.
Will they cut again? The consensus has changed rapidly that rates may be on hold from here. I’m not as convinced – the statement was bland and vague, so I don’t think there was much information in the statement or guidance on rates. The sentiment was downgraded modestly given that they took out the sentence suggesting the inflation outlook may provide some scope for further easing, but the board still stands ready to “adjust policy as needed”. That’s a very minor change and not one worth changing your view on.
For me the policy makers really have no idea what they are doing, and the heavy political overlay on the Reserve Bank board is just dangerous. Cutting rates in the build-up to an election is a political statement. The problem is that the Labor government has been in disarray for years – it took them years to begrudgingly acknowledge they screwed up removing Kevin Rudd. If they can’t get their political strategy right, how can we expect this party to then come up with a coherent, workable economic plan to govern in the interests of the nation?
I’ve got no doubt the government smiled as it stacked the RBA board with ex-manufacturing lobbyists and ALP staffers, thinking it would be an easy ride to slash rates and impose an exchange rate target. They were right about that, but what they didn’t factor in was how disruptive this strategy (to get the lowest rates on record and a lower dollar) would be for the rest of the nation. Confidence is shot and consumer spending – the key driver of economic growth – has declined sharply from last year. Non-mining investment is still at recessionary levels almost two years after the Reserve started slashing rates. All in all, this is just one more failed government strategy.
Hopefully we’ll see some much needed discipline imposed on this reckless board with a change in government. At the very least, the Reserve’s easing cycle has brought no discernible benefit to the economy – the evidence in fact shows it has done harm. At worst, we’re already seeing the distorting influence record low rates bring. Indeed there is much press today of another house price boom – and why not, that’s exactly what we are seeing in Canada, New Zealand, England and, yes, even the US again.
Meanwhile, business groups warn that the latest interest rate cut won’t have much of an impact. So it’s an exercise in stupidity, then. The sooner we are done with it the better.
Read more: http://www.businessspectator.com.au/article/2013/8/7/markets/scoreboard-recurring-nightmare#ixzz2bEeWy3Pg
DATA HIGHLIGHTS AHEAD (times are in AEST) – 515pm Swiss CPI. 730pm UK BOE Gov Speaks & Inflation report. 1030pm CAD Building permits. 12am CAD PMI
AUDUSD – Priced stopped on 90cents but we have formed a nice ring low and look for it to target 9140.
EURUSD – A HH/HL but stuck under minor resistance of 1.33 and gone nowhere for a week now. Not seeing an entry worthy of risking my money on yet.
GBPUSD – A HH/HL yes, but also a high test against resistance of 1.54, again, in the middle of the range and not worth looking at just yet.
NZDUSD – Came back and filled the gap in nicely and is looking at the 50ema. Expect some more frothing from the kiwi in sessions to come, again, nothing to see here for the time being.
USDCAD – A LH/LL and ring high. But it is above support and the 50ema. So I am in the trade and managing it. Would still expect it to continue to make HH/HL in the larger cycle of this 12month trend.
USDJPY – Yen continues to strengthen and has made a LL, setting a good trend. Missed the entry yesterday so will be looking for an opportunity on shorter timeframes to go with this bear trend.
GOLD – Took a $20 hit to the chin of the bulls as it now trends lower. Another one I will be looking for opportunities on the shorter timeframes.
David Long/ Proprietary Trading Manager