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Aussie Suffers as RBA Cuts Benchmark Rate

Last updated 11/1/2011 3:45 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

As expected the Reserve Bank of Australia lowered its benchmark rate by 25bp to 4.5%   noting that, “recent information is consistent with a moderation in the pace of global growth, though fears of a major downturn have not been borne out so far. “ The RBA noted that inflation, while still above target is likely to decline as weather effects of last summer begin to recede with more crops coming on to the market while labor costs will ease as well as employment growth cools. As a result, the RBA expects inflation to be consistent with  2-3% growth in 2012 and 2013.

Therefore the RBA decided that, “With overall growth moderate, inflation now likely to be close to target and confidence subdued outside the resources sector, the Board concluded that a more neutral stance of monetary policy would now be consistent with achieving sustainable growth and 2–3 per cent inflation over time.”

The move to a more neutral posture should be a welcome sign to the country’s    retail and housing sectors. Housing prices have dropped for 3 consecutive quarters amidst slowing demand and decline in consumer confidence. Today’s action will likely result in lower service costs for  many Australian homeowners where the majority of mortgages are variable rate.  the news could provide a small boost to growth going into the key Christmas season.

The Aussie tumbled in the aftermath of the release dropping through the 1.0400 level in early morning European trade. The pair was being driven lower not only by the change in monetary bias from the RBA, but also by the heightened sense of risk aversion amongst investors as the renewed concerns over the Greece and the possibility of criminal activity prior within MF Global and the worst PMI reading out China in 36 months all weighed on investor sentiment.

The Aussie remains the predominant carry trade currency in the G-20 universe, but with today’s action the RBA has clearly reversed course on interest rate policy going forward. Given its massive interest rate differential versus the other majors, the Aussie will continue to remain closely tied to risk appetite for the foreseeable future, but it may lose some its luster if RBA lowers rates further into the end of the year and beyond.      

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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.