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Could RBA Hold Off on Rate Hikes?

Last updated 1/27/2010 12:52 AM ET (GMT -5) 18 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Australian CPI printed broadly in line with expectations. Trimmed mean CPI came in at 0.6% as projected while the q/q  numbers were a bit hotter at 0.5% vs. 0.4% eyed. The largest drivers of increase in prices were housing, food and beverages and holiday costs.

The  market rallied the Aussie pushing it to a session high of 90.45,on the assumption that the RBA will resume its rate hiking process at its next meeting on Tuesday. Expectations of a rate hike rose from 60% prior to the release of data to 80% in post news trade.

Nevertheless, some doubts persist as to whether the RBA may act on Tuesday given the recent spike in risk aversion in global capital markets. China’s clear signals that it intends to tighten monetary policy in Q1 of this year have sent risk assets lower with Aussie the prime victim of this trend. Currency traders fear that reduced demand from China will quickly cool Australia’s growth providing little reason for further tightening from the RBA in the near term.

Australian fiscal officials also adopted a relatively cautious tone, with Treasurer Wayne Swan noting that inflation pressures “remain subdued.” Australian policymakers must balance the strong domestic recovery  against the much more lackluster rebound in global demand. Australian labor markets continue  to operate at high capacity and are the primary argument for further tightening. However, there is a chance that labor may have reached peak demand if global economic recovery has run out of momentum leading to weaker growth as the year progresses.   

Friday’s US GDP report could be key to the RBA’s decision making process. If US data prints significantly worse than the expected  4.5% q/q  increase, the monetary officials in Sydney may err on the side of caution given the recent signs of a slowdown in global growth. For the time being the risk of no further rate hikes from the RBA remains real despite the high level of expectation in the markets and is the key  reason for why Aussie has had only a modest response to the CPI data.    

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Comments (18)

hsbc

January 27, 2010 at 02:43 AM ET

any idea why gbp is so strong today?

bschlossberg

January 27, 2010 at 03:51 AM ET

No it must be corporate flows on eurgbp

FD

January 27, 2010 at 05:02 AM ET

What is going on with GBP - should be falling through the floor but instead it is posting a good little rally????????

alexjbrandt

January 27, 2010 at 05:19 AM ET

Earlier comments from MPC member Andrew Sentance have increased UK inflationary concerns. The comments will have many bringing forward the likely timetable for a UK rate hike.

Sentance comments:

* Cannot rely on goods deflation to hold down CPI while sterling fall feeding through
* Large range of uncertainty around CPI outlook at present
* Business surveys suggest margin of spare capacity not as high as expected
* There may be less labour slack than in equivalent stage in early 80s, 90s recoveries
* If headwinds from crisis, fiscal tightening dominate, CPI risks to downside
* If stronger global economy, confidence, weaker sterling dominate, then more up pressure on CPI
* Risk that fiscal policy is tightened more aggressively after election
* We should avoid the feared double-dip recession, but pace of recovery very uncertain


Talk of Middle Eastern selling interest having emerged above 1.6200, but it hasn’t really slowed progress too much so far. It should be remembered there was talk of Middle Eastern sovereign purchases recently down around 1.6100. Maybe a little bit of profit taking.

FD

January 27, 2010 at 05:45 AM ET

Thank you Alex for the very comprehensive answer.

bschlossberg

January 27, 2010 at 05:20 AM ET

BOE's Sentance was very hawkish in his speech

FD

January 27, 2010 at 05:33 AM ET

Wow, that caught me with my knickers down! I assumed that as Sentance is usually OTT on being positive the market would not react that sharply. Is this another good oppertunity to go short GBP/USD though?

alexjbrandt

January 27, 2010 at 05:45 AM ET

So you don't get caught with your knickers down, I use this site as well for more up to date economic events that influence the currency market:

http://www.forexlive.com/

I use it cause the MT4 platform news feed from the FCM I use isn't really that great.

A bit about the site: there is a bit of delay between the event and them posting it but it could help you if you want to know what is causing some price flucations. Theres 3 guys who provide the news feed and each one covers a session, 24/5.

FD

January 27, 2010 at 05:50 AM ET

Good site- thank you

schultzz.at

January 27, 2010 at 07:25 AM ET

I just went short at 1.6240 with a stop at 1.6270 and TP at 1.6120. If this one fails I eye 1.6450 for another short.
U.K. economy is stagnating. I expect the break of the 1.57 support in some weeks.
Tom Schultz.

bschlossberg

January 27, 2010 at 07:34 AM ET

Best of luck Tom, makes sense to me

FXDragon

January 27, 2010 at 09:37 AM ET

I love the metaquotes platform. The black background makes you feel youre travelling in space through those meridian and parallel like squares. Dealbook would not let me demo trade after a month:((.... Plus it looks like a boeing 737 cockpit. Its hard to figure out quick.

Sincerely,
Customer

alexjbrandt

January 27, 2010 at 09:53 AM ET

I like the MT4/MT5 platform, just that it would be better if the news source was more in depth. I only liked the Deal Book 360 for its news source and that it had more indicators (I spent a while exploring each one) after my one month trial expired I had to find other options for a good stream of news data that reflected the price movements in the pairs.

FD

January 27, 2010 at 12:55 PM ET

Pretty much pulled my knickers back up :) that was not a fun day! Just goes to show that no matter how sure you are it never ever goes completely according to plan. We live to fight another day.
Fergus

aandrew60

January 27, 2010 at 03:16 PM ET

Congrats Tom - you should hit that TP very soon!
Allen

schultzz.at

January 27, 2010 at 04:06 PM ET

Allen, thanks for your encouraging words, but my trading rules require that I never go into a Fed policy announcement or an NFP release with an open position. These releases cause too much volatility for a sensitive character like me.
The GBP/USD short just earned me enough money to buy a six pack of beer which I am enjoying right now. Cheers!
Tom Schultz.

aandrew60

January 27, 2010 at 04:17 PM ET

It was my pleasure to wish you well for sure. Rats is all I can say - good for you though - that is a very prudent move... I thought it was a great trade though and thought well, he might close it out early, but still get you the whole case instead of the six pack!

hsbc

January 27, 2010 at 05:46 AM ET

really caught short this time

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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.