talking about poms here is a great pom....marcus padley
As mentioned in this morning’s email the implication from recent RBA statements is that rates will return to more “normal” levels in time. This has been interpreted to mean 6%. In other words, once the rate rises start, which they have today, they are expected to rise in 25bp increments from 3.0% to 6.0% (economic performance allowing). That implies 12 rate rises, possibly on the trot.
At the same time the US has said that rates will remain exceptionally low for an extended period of time. In other words the gap between Australian and US interest rates is going to widen before it narrows putting pressure on a further rise in the A$.
The A$ is up from 87.78c to 88.44c today – this move will feed talk of parity in early 2010. If China behaves itself (feeding commodity prices and A$ strength) then a further rise in the A$ looks highly likely.
The fact that Australia is the first to put up interest rates will make global headlines and attract the attention of international investors. They are likely to anticipate a higher A$ as well which will encourage them to invest in A$ assets and, therefore, the equity market. All in all this interest rate rise is a good move for the Australian equity market despite the usual theoretical impact on discounted cash flow valuations.
