After thoughts from the research team
As widely tipped, the RBA chose to hike rates from 3.75% to 4%. Looking at the price action on the Australian dollar it appears traders were more intent on focusing on the RBA’s statement rather than the actual 25bp rise.
With the 30-day interbank market pricing in a 66% chance of the 25bp move for March, one may expect the Australian dollar to strengthen against the greenback. However, this was not the case and we saw a trend down to 89.66 levels before tracking back above the 90 handle in European trade. The move back above 90c was likely because it tracking the Euro’s strength rather than further interest rate expectations.
The RBA Governor confirmed that the process of moving rates back to average levels will continue and added that the 25bp move was ‘a step in the right direction’. Glenn Stevens stated, “In Australia, economic conditions in 2009 were stronger than expected”. He also noted that the ’labour market data and a range of business surveys suggest growth in the economy may have already been at or close to trend for a few months’. It goes to show the emphasis the RBA put on labour market data and the business surveys, when the Q4 GDP is not available.
What was noted by economists was a slightly more optimistic tone from the RBA governor. In the previous statement he emphasised the fall in business credit, however the RBA seem a bit calmer on this subject and mentioned that lenders are starting to become more willing to lend to some borrowers. Importantly though, it stipulated that Sovereign debt remains a concern for them.
The question for forex traders now remains - when will the RBA look to increase rates further? Economist are still viewing a ‘normal’ rate setting at 4.5%- 4.75%, so expectations are for 3, maybe 4 more rises this year. The question will be, what months will they move on? It seems that the market is viewing the March statement as less hawkish than some had anticipated. As it stands, the 30-day bank is pricing in a 20% chance of a move in April. This view is backed by economists, with the bulk looking for the RBA to hike in May. A rate rise in April can’t be ruled out though; traders will focus on upcoming GDP, inflation, employment numbers, and business surveys to position themselves here.
With the Australian dollar being a standout performer in 2010 against the greenback, relative to other currencies, it seems to be the proxy for the risk trade for global traders. With the Australian economy easily the best performer in the G-20 region, any better-than-expected data should translate into Australian dollar gains. In the short term however, we are more likely to see the currency trade in a range until some of the global macro fears play out with currency forecasters (source: Bloomberg) looking for the Australian dollar to peak in the third quarter of 2010 at 93c.
A case for a rate rise
Shortly after the RBA held rates in February, jobs data showed a surge in employment that surprised even the most bullish of analysts. The jobless rate plummeted to 5.3%, the lowest level in a year and well ahead of the 5.5% figure economists had been forecasting. To achieve robust growth in Australia, we need to see strong employment. This breeds confidence amongst consumers, which in turn supports consumption. We feel the economy may grow around 3% this year, so higher rates in the short term can be justified.
The big concern stemming from this data will be an increase in wage pressures, which will ultimately push inflation higher. Inflation is currently within the RBA’s target range, however it is one of its main concerns looking forward.
Whilst inflation and its outlook is usually the main determinant of rate rises, Governor Glenn Stevens made it clear a few weeks ago that it is the central bank’s duty to lean against a bubble. The RBA clearly views Australia’s property market as ‘overheated’. This gives it even more reason to lift rates.
The employment numbers were probably the most crucial data, however there’s been plenty since to indicate a strong economic recovery locally. Recent releases of a leading index of economic activity from Westpac and Melbourne University's Institute of Applied Economic & Social Research showed significant growth.
Looking at potential trades here, with a rate increase we should see the Australian dollar price in this move. Investors will invariably look at the accompanying statement for further signs of whether the RBA will increase rates again in the upcoming months. This could have a strong bearing on how traders position themselves after the March’s rate announcement.
Stocks leveraged to the consumer such as the discretionary sector and some of the staples names like Wesfarmers and Woolworths may come under some selling pressure. However, we have seen in the past little immediate reaction from traders when the RBA surprise on rates. Banks will no doubt find support, but importantly market participants will focus on how much banks increase their standard variable rate.
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Updated: 02/03/10
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