RBA - Too Hawkish For its Own Good?

Last updated 10/15/2009 10:48 AM ET (GMT -5) 6 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Last night RBA Governor Glenn Stevens signaled that Australian monetary authorities will continue to tighten policy as the year comes to a close. Speaking to an audience in Perth Stevens said, “If we were prepared to cut rates rapidly, to a very low level, in response to a threat but then were too timid to lessen that stimulus in a timely way when the threat had passed, we would have a bias in our monetary policy framework. Experience here and elsewhere counsels against that approach.”

Governor’s Steven’s hawkish comments sent Aussie flying with the unit hitting fresh yearly highs of .9227 in overnight trade. Currency traders are now anticipating at least 25bp and perhaps as much as 50bp worth of rate hikes before the year end. But is the RBA moving too fast for its own good? The Australian central bank appears to have factored in a V shaped global economic recovery in 2010 with growth exceeding 3%. Those assumptions may be wildly optimistic given the fact that most analysts expect the GDP growth in EZ to expand only at a moderate 1.5% while US is projected to rebound by 2.5%.

Of course Australia’ sphere of influence is Asia, which has performed considerably better than Europe and North America in 2009 as China continued to drive growth throughout the region, but even here RBA’s assumptions may be too rich. A very large part of China’s growth this year was the massive stimulus package put forth by the government. As we’ve noted in the past the massive fixed asset investment flows of 33% are unsustainable and the torrid pace of lending that characterized Chinese finance at the start of this year has cooled considerably suggesting that Chinese demand going forward may be more modest than the RBA believes.

Furthermore, the meteoric appreciation of the Aussie, which has appreciated more than 8% this month alone could act as dampening factor on prices going forward alleviating the need for successive rate hikes.

RBA ‘s biggest concern may be the burgeoning property bubble in Australia as Chinese capital floods into the country. Yet in trying to curtail this development, the central bank may overreach and stifle the recovery Down Under. Already we see initial signs of trouble in data as both NAB business and Wespac consumer surveys declined from the month prior and as rates begin to ratchet while its strong currency weighs on the country’s export sector RBA actions could quickly reverse the bullish conditions currently in place.

Comments (6)

aloen

October 15, 2009 at 12:18 PM ET

Hi Boris, if AUD too strong, don't their export goods and mining product (iron etc) became expensive? and country like China will try to buy from another country with cheaper price? so why RBA prefer to have strong AUD?
Thanks

FXDragon

October 15, 2009 at 04:43 PM ET

Inflation. Central banks are obsessed with inflation for some reason:)

Doobp

October 16, 2009 at 03:10 AM ET

It increases the reserve, isnt it? But I heard they need to increase the interest rate because of property bubble. in my opinion, AUD may get shaky at 0.96..

Jason1277

October 16, 2009 at 08:05 AM ET

With recent results from RIO suggesting continued strength in Iron Ore exports as well as the strong gold price and expected interest rate increases, expect the AUD to push up to parity and above wih the USD, barring some type of sept 11 incident or correction in financial markets, with China being so close to Aus, the shipping costs still may out way the increase in the AUD....but i am far from an expert....

Jason1277

October 16, 2009 at 08:09 AM ET

Also i am not too sure on this but i think Aussie sell thier mining products in US dollars, hence the high AUD is actually havinga detrimental effect on companies like BHP & RIO am i correct in this assumption?

Biowolf

October 16, 2009 at 12:04 PM ET

Bingo, Boris.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.