(This is an excerpt from an article I originally published on Seeking Alpha on May 7, 2013. Click here to read the entire piece.)
Tonight (morning of May 7th in Australia), the Reserve Bank of Australia cut its interest rate to 2.75% whereas the consensus assumed that rates would stay steady at 3.0%. While the market has priced in rate cuts for later this year, I find myself mystified by the timing and context of this latest rate cut. The RBA’s latest statement on monetary policy says almost nothing new and does not point to a single locus of economic danger to justify another cut.
{snip}
Adding to my mild bewilderment is that the RBA has mostly positive things to say about economic conditions overall. {snip}
In other words, almost everything the RBA cites looks pretty good or is at least pointing in the right direction. A casual reader of this statement should be hard-pressed to understand the urgency for cutting rates to new record lows. Australia has some very high class problems!
The closest real justification for the rate cut comes via the stubbornly high exchange rate and low credit demand:
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The RBA makes a point this time to note how long the exchange rate has remained stubbornly high. I have to assume this slight rephrasing means that the RBA’s patience could finally be wearing thin. If so, the Australian dollar lands right back in bearish territory for me. {snip}
…Whatever the true problem, the RBA weakens its case by not directly and overtly making a strong case for these rate cuts. Is it the exchange rate? Is it a lack of confidence in China’s growth potential? Is it a forecast of a crash in consumer spending or in housing if rates do not drop ever closer to zero? These monetary policy statements lack the substance that other central banks provide when they chart a course for historically low interest rates.
{snip}
Source: FreeStockCharts.com
Be careful out there!
(This is an excerpt from an article I originally published on Seeking Alpha on May 7, 2013. Click here to read the entire piece.)
Full disclosure: newly short the Australian dollar