RBA Says Enough Is Enough

The Reserve Bank of Australia published the minutes of its July 3rd Monetary Policy Meeting (at which they left the overnight rate unchanged at 3.50% - which was market consensus at the time). After presenting various reasons that the economy is slowing but not catastrophically so, that inflation is contained and will probably continue to be for awhile, the RBA concludes that the previous cuts that have lowered the rate from 4.25 to 3.50 in the space of half a year should be enough to stimulate the economy in the near term.

Given all the uncertainties about China's response to their slowdown, the future path of the European crisis and the recent slowdown in the US, it does make sense to not shoot all of their bullets at once. 

AUD to Appreciate on Hawkish RBA, Resilient Economy

Before the June RBA meeting, the market was predicting even chances of a quarter and half point cuts. This was despite the fact that relatively speaking Australia's economy has been faring quite well despite the recent weakness in China. Well so much for that, as the minutes of RBA's monetary policy meeting showed today.

The Board considered whether the recent information warranted a further reduction in the cash rate. The arguments were finely balanced.

Cutting aggressively was apparently not even discussed. The question was whether to cut at all.

Australian Dollar's Double Jeopardy

This week it feels like the AUD was punished twice for what is essentially the same "crime". On Monday morning Asian time, the Producer Price Index (PPI) disappoints, coming out 0.6% lower than expected. The Australian dollar promptly sells off against the USD and JPY. This makes perfect sense - lower PPI generally feeds into lower inflation, thus an increased likelihood of a rate cut at the next RBA meeting. So far so good.

Overnight, SPX stabilizes and most "risk" currencies bounce a little in line with the equity market. On Tue morning Asian time, Australia's Consumer Price Index disappoints by a roughly equivalent amount. On this data release, the AUD drops again.

NAB Lowers Australia GDP Estimate. More Revisions to Follow?

It is starting to hit home that most sectors of Australia's economy are not benefiting from the riches generated by the export of natural resources to China. National Australia Bank, one of the big four banks in the country has lowered its GDP estimate for 2012, saying that

Despite a mining boom, the Australian economy has performed poorly in the first few months of 2012, and policy makers are expecting unemployment to rise in coming months

(See Australian Bank Cuts Growth Forecast For Economy).

The tentative decrease from 3.25% to 3% is quite modest and will most likely be followed by further

Australia Should Learn from Brazil in Fighting the Resource Curse

Australia continues to suffer from the "Dutch disease" with export revenues from the resource extraction industries pushing up the value of the local currency and thereby making manufacturing and the services (such as tourism) uncompetitive. This is a theme we have discussed before - see for example Australia's Two Speed Economy. The situation continues worsening, with an anticipated return to trade surplus failing to materialise in the Feb trade data released today (deficit of AUD -480mm, relative to consensus for a surplus of  AUD 1.1bn).

It should be quite clear that the strong currency is hurting many non-resource sectors of the economy. Yet other than including in their Monetary Policy press release a boilerplate statement to the effect

AUD Continues to Track Overall Risk Sentiment, Ignores Fundamentals

Over the past few days, all eyes have been on the Greek debt swap, with S&P futures quite volatile, swayed by rumours and expectations. At the same time Aud/Usd continues to trade in risk-on / risk-off mode, paying little heed to the economic reality. It underperformed slightly when GDP came out worse than expected on Wedn morning, but pretty much ignored worse employment data on Thu and an surprising trade deficit Fri morning. Overall things are not looking great at all, but the currency is

More Cracks Appear in AUD's Facade

According to Marketwatch and other sources, Fitch has lowered the ratings of three of the top four Australian banks. As discussed previously, the action has been flagged well in advance. The Marketwatch article says the AUD dropped and it probably did to a small extent right after the announcement. Overall though, the market is still quite complacent of the issues "down under" and trades with a built-in expectation of continued strength in the Australian economy. The focus has been almost exclusively on the Greek drama and the Iran standoff and its impact on the world supply of oil. It appears that investors are still not really making the link between the weakness in China and its suppliers of raw materials.

RBA Complacent on China as Evident in February Minutes

If China's bubble were to burst, that would clearly take Australia's economy down with it. The minutes of RBA's February meeting show a complete complacency over China's economic slowdown (and the power of Beijing to control it):

Importantly, though, the Chinese economy continued to expand strongly, albeit below the pace of the past couple of years, and inflation there had moderated. Prices and turnover in the Chinese residential property market had fallen, especially in the coastal provinces, where measures by the authorities to cool the market had been most aggressive;

RBA Playing With Fire - Keeps Rate Unchanged

Today the Reserve Bank of Australia decided to keep the cash rate unchanged at 4.25%. Analyst consensus was for a quarter point cut. Also the OIS market was implying a ~75% chance of a cut. RBA's decision comes as a surprise, given the recent labor market weakness and drop in retail sales. Governor Stevens' statement reads a little bit like "everything is on track and on trend so why change anything?", but does recognize that

Year-ended CPI inflation will fall further over the next quarter or two. In underlying terms, inflation is around 2½ per cent. Over the coming one to two years, and abstracting from the effects of the carbon price, the Bank expects inflation to be in the 2–3 per cent range.

As inflation is unlikely to present a problem in the near future and given the challenges to global growth (and China in particular) a rate cut might have been a lot more prudent. As always time will tell.

AUD a New Safe Heaven? Bad Joke

As WhatIf has mentioned earlier, the fundamentals are not looking good for Australia. All the non-resource sectors appear to be stagnating, to a large extent hurt by the strong currency. At the same time material exports, while very strong at the moment, are mostly going to China. And China is slowing down.

There has been some talk in the market / media of the AUD becoming a new safe heaven as one of the very few remaining AAA economies. It's a nice story but clearly not true - a minor hiccup in equities still sends Aud/Usd tumbling. As it should, seeing as Australia's economy is to a large extent just a leveraged, liquid bet on China.

Is the RBA Missing the Point?

Considering that China is now Australia's largest export market, I find it surprising that the RBA minutes only contain this small paragraph on the economic conditions there:

In China, most of the monthly indicators, including for industrial production and retail sales, were still consistent with solid GDP growth. However, conditions in the housing market were noticeably weaker than over the past couple of years, reflecting the effect of controls on buyers and tight credit supply for developers. Members noted that this slowing was in line with the authorities’ intentions.

RBA should be much more concerned about the situation in China - the unsustainable increase in local government debt and the political risk of the coming transition of power in 2012. The biggest challenge for the Australian government and the RBA should be finding ways to reduce its arguably overpriced currency and rebalance the economy away from reliance on the resource extraction sector. Given that "most firms ... expected wage pressures to remain contained" a more aggressive 50bps rate cut would have made more sense.