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RBA Cuts 25bp But Focus Turns to Labor Market

Last updated 4/7/2009 3:49 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

The Reserve Bank of Australia made a Solomonic decision tonight lowering rates by 25bp to 3.00%. The RBA split the difference between Aussie bulls who anticipated no change whatsoever in the overnight rate and Aussie bears who forecast a  larger 50bp cut. In commenting on their decision the board noted that , “There has already been a major change in both monetary and fiscal policy in Australia. Market and mortgage rates are at very low levels by historical standards and business loan rates are below recent averages, reducing debt-servicing burdens considerably. Nonetheless, the Board judged that there was scope for a further modest adjustment to the cash rate."

Up to now, Australia has been able to avoid the worst of the global economic contraction with the country output shrinking only a modest -0.5% in the last quarter of 2008 after a record setting 17 years of uninterrupted positive growth. However, Australian policymakers including Ric Battellino, the Reserve Bank of Australia's No. 2 official,  are convinced that the economic growth will not return in 2009. In a recent speech in Brisbane Mr. Battellino noted that the easing measures “will go a long way to offsetting the negative influences on the economy coming from abroad, but the reality is that we cannot fully insulate ourselves from what is happening elsewhere in the world, as such GDP is likely to fall in 2009.”

While growth is a problem, the RBA’s true concern may be the rising tide of unemployment. The Australian Chamber of Commerce is projecting that unemployment may hit a whopping 9% this year from the current 5.2% level. The next labor market data is due 0:30 GMT this Thursday with market estimates calling for a -25K loss in jobs. The unemployment report  could prove to the pivotal factor in determining the currency’ short term direction.

The Aussie actually rebounded in post announcement trade with the unit rising to 7160 from the pre-news lows of 7040. Currency traders were relieved that the rate cut was only half as much as the more dovish estimates and the AUD/USD  rallied on short covering and slightly better risk appetite. Nevertheless the Aussie is likely to trade cautiously ahead of the unemployment report bounded by 7200-7000 range and should the labor market data prove more negative than expected the unit would very likely break the 7000 level of support as traders will begin to price in yet another rate cut from the RBA

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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.