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Wednesday, 4 March 2009

Commentary by Boris Schlossberg: RBA Does Not Budge

The Reserve Bank of Australia kept rates on hold at 3.25% surprising the currency market which expected a rate cut of 25bp or more. The move came on the night when the country reported much better Retail Sales of 0.2% versus -0.5% expected as well as in improved Current Account number of -6.5 Billion versus forecast of -7.3 Billion deficit.

In commenting on their policy decision RBA Governor Glenn Stevens noted that, "There has already been a major change in both monetary and fiscal policy. The board will consider the position again at its next meeting." The non committal statement suggests that the RBA board may remain stationary in April as well.

Australia’s economy has been relatively immune to the ongoing global economic crisis with employment last month actually increasing by 1.2K jobs versus projections of -18K loss. Governor Stevens referenced that point noting that Australia's economy is holding up well and is not experiencing the severe downturns in the rest of industrialized world.

As a key supplier of commodities to China, Australia along with New Zealand is unique amongst Anglo Saxon economies in that demand for its products remains buoyant as Chinese growth continues to be positive. Additionally, the majority of country’s homeowners hold adjustable rate mortgages and have therefore benefited directly from the lowering of overnight cash rates over the past six months as their debt service costs have come down freeing up more disposable income.

Nevertheless, many Aussie bears argue that its is simply a matter of time before the Land Down Under succumbs to the same economic problems affecting the rest of the G10 universe. Indeed the latest business and consumer confidence surveys show a massive collapse in sentiment as global demand continues to grind to a halt. If Chinese growth declines much further, Australia’s relative outperformance will most likely vanish.
For the time being however, the Aussie appears to be the star of the show. With a 3.25% interest rate it is one of the few high yielders left in the G-10 block. As the rest of the currency regimes move ever closer to Zero Interest Rate Policy, the Aussie could continue to attract capital on yield differentials alone. As long as Australia can maintain even a modicum of positive growth it will remain the one bright beacon in overall gloomy economic climate.

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