RBA cuts rates with more likely in 2013

<p>We spelt out the case for an RBA cut last week in our note titled “Reserve Bank of Australia has room to cut rates” so […]</p>

We spelt out the case for an RBA cut last week in our note titled “Reserve Bank of Australia has room to cut rates” so the decision to cut rates today by 25 basis points comes as no real surprise. Instead our focus is on the actual statement and right from the very beginning the RBA has made it clear its priorities have shifted from being concerned about domestic inflation to joining the global effort by other central banks to stimulate each respective economy.

The RBA among global issues is citing a peak in Australia’s terms of trades and a possible peak in the investment pipeline of key mining and energy projects by mid 2013, albeit at lower than expected levels. This is very important and a point we don’t necessarily agree with. We have focused on individual company announcements in the past few weeks, citing not a cancellation in projects but a process of deferral in major new commitments – pushing back large investment decisions. Projects aren’t disappearing in Australia, companies are not walking away, they are just choosing to buy more time and implementing less immediacy in large investment decisions.

Is the RBA over reacting?

Large construction projects were always an inflationary issue for the RBA – adding upward pressure on wages and something that needed to be contained. That fear seems to have completely disappeared when reading today’s statement. Perhaps the RBA was over reacting to inflationary pressure in the past and is now going to the other extreme. While it is important to acknowledge the need to cut the benchmark rate, the way the RBA is viewing the investment pipeline is not completely in check with the market. With that in mind, we think the RBA has more cuts in store for 2013 before it will be forced to re-evaluate.

The importance of moving in October rather than November has two objectives – first it gives banks an opportunity to make cuts to their products in time for the busy Christmas trading period and secondly it breaks the predictability  cycle (moving on Melbourne cup day in November was widely anticipated). By bringing forward this cut, we think the RBA will now sit idle in 2012 before moving again early next year, probably another 25 basis points in February.

A$ upside capped

The A$ is likely to go through a process of stabilisation over the next few weeks. We think upside is capped at around US$1.0405 over the next few weeks with a test of US$1.0280 within the next few days. That range should hold and any further moves downwards towards parity will be met with solid support. Ben Bernanke is still running the US printing presses at full capacity for another three years and the A$ is a currency of choice for those seeking yield.

 

 

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.