asia up, australia down, $a up, page-20

Hi datasponge,

Now, I must disagree.

In 2 of the 4 specific reasons cited by the RBA for raising rates in December was the improving international economic scene.

This was cited as reason #1.

Reason #2 was cited as improving domestic economic conditions bouyed mainly by accelerating commodity prices, improving farm returns, and increased farm exports.

Inflationary conditions /expecttaions were cited as reason #3.

Domestic credit expansion was cited as reason #4.

The fact remains, the RBA increased rates in December in response to their perceived interpretation of improving international economic conditions. They were also anticipating other Central Banks following suit in December. When they didn't, the RBA was caught out.

There is now a perceived and growing risk of a mismatched monetary policy setting vis-a-vis international economic conditions. On this, the RBA is now ahead of the curve, meaning that it is now risking over-engineering any form of soft landing. Potentially, quite the contrary.

As the global position continues to improve, it could well be that Australia will start heading into an economic downturn (induced by RBA policy) ahead of the World. Rather than being in synch, we are now out of synch with the World, our major trading partners and every OECD nation out there.

With the current A$ fix @76.73, it is clear that the A$ is now starting to get away from forecasters, market players and industry alike.

Some may well suggest that this is due to the collapsing US$.

Partially so. But given that the ECB is talking openly about pushing the EURO down in the very near term, and the fact that the A$ has dramatically appreciated against all mainstream currencies out there, suggests 3 things:
1)
commodity driven FX valuations;
2)
the interest rate differential creating a skewed FX position; and
3)
global institutions (including the likes of George Soros) potentially putting the A$s in play in much the same way as Soros had previously punted on breaking the GBP.

Since the 6th December, the A$ has risen from 72.8 to 77.8, a rise of 5c, for a 1 month appreciation of 7% of value. Neither exporters, miners, manufacturers, financial institutions, superannuation funds, or private investors can keep pace with that sort of rise (which has now been 22% since end September).

There is no doubt that the A$ is the subject of red hot speculative money out there.

It's just a question as to whether this red hot money represents:
1)
interest rate differential money being parked in A$;
2)
speculative money anticipating another rise in A$ rates (falsely assuming that the RBA will raise rates again in January) - not the rapid acceleration in the A$ in the lead-up to today; or
3)
a currency in play.

1) has been in play for some time.

2) and 3), however, are quite new and could well now be explaining part of the A$ action out there.

In effect, the RBA is now pricing Australia out of the market and is inducing a sharp downturn in domestic economic activity (code for Recession).

Last year, the RBA moved far too late in trying to raise rates back to neutral (I was arguing for this to occur back in March /April). Now, they have moved far too late and are relying upon:
1)
empirical international evidence;
2)
gut feel and perceived impressions of the international scene;
3)
mistaken beliefs that they are in synch with international Central Bank trends; and
4)
most of all (and domestically) historical economic data which goes back 12+ months (as opposed to contemporary and emerging economic data).

Yet again, the RBA is likely to over-correct on the upside (just as it did on the down-side).

The consequence of this, however, is that they have potentially damaged the underlying integrity of the A$ and prospectively consigned it to speculative currency status.

An A$ in speculative play, that's my impression. And when the game stops and the foreigners take their returns, a very sharp fall in the A$'s value could well result.

So, just how in control of the economy is the RBA? It is increasingly looking like - holding on by a tenuous thread.

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RBA PRESS RELEASE RELIED UPON IN THIS POST
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Following a decision taken by the Board at its meeting yesterday, the Bank will be operating in the money market this morning to increase the cash rate by 25 basis points, to 5.25 per cent.

In reaching this decision, the Board took into account the following considerations:

1)
Economic conditions around the world have continued to improve. In the United States the pace of growth has picked up markedly since mid year, and there is increasing evidence that the US recovery is becoming more broadly based. Stronger conditions have been evident in Japan, China, and other parts of east Asia, and also, to a lesser extent, in Europe. As a result of these trends the international climate, though still not without risks, is more favourable than has been the case for some time.

2)
In Australia, the indications are that the economy has strengthened considerably since mid year. The pace of consumer spending has accelerated sharply, business confidence is high, and the labour market has firmed over recent months. While the exchange rate has appreciated, the stronger international climate, rising commodity prices and more favourable conditions in the farm sector indicate improving export prospects. Hence, notwithstanding some early signs of a change in sentiment in the housing market, the overall prospects are for strong growth of the Australian economy.

3)
Australia's inflation rate at present is close to the target mid-point. While domestically sourced inflation pressures have risen, the overall inflation rate is being held down by the effects of the higher exchange rate on prices in the tradeables sector. In the short term, these exchange rate effects are likely to reduce the inflation rate further. Once these effects start to fade, however, CPI inflation is expected to be on a rising trajectory given the strength of domestic demand, firming labour market conditions and continuing strong price pressures in the non-tradeables sector of the economy.

4)
Monetary policy is continuing to have a stimulatory effect on the economy through domestic credit expansion. The growth of credit remains rapid and indeed has picked up further in the past few months. The prevailing level of the cash rate after the November increase was still below neutral, and interest rates of financial intermediaries remained low by the standards of recent years.

In these circumstances the Board took the view that a further increase in the cash rate was warranted in order to reduce the degree of stimulus to the economy from monetary policy.