Australia Focus : Unexpecting The Expected

I thought we were expecting a rate cut ?

28 Jan 2015
An article in Australia’s best-selling metropolitan newspaper (Herald Sun) claims the RBA has shifted its thinking on the economy and is likely to cut interest rates next week. http://www.businessinsider.com/rba-considering-rate-cut-2015-1#ixzz3R1tysgu4

But reports suggested it was unexpected.

Because nobody reads Australian newspapers ?

And so the expected became unexpected even though over a dozen central banks have eased in January alone and Australia still has one of the highest base rate in the developed world for a AAA country that starts with the number 2.

central banks rates

Just look at Denmark and Switzerland, as negative as negative goes.

negative yields

As far as expectations goes, there is a chance of another 0.38% cut in the next 12 months which means we shall see another 0.25% cut for sure and 50% chance of a 0.25% after.

I say, it is currency war time and its time to beggar or be beggared. https://tradehaven.net/market/fx/soul-searching-in-a-currency-war/

And I am not the only one.

Currency Devaluations Are An Undeclared War
“A weak currency might provide a short-term boost to the countries engaging in currency devaluation,” he said. “However, if everyone is playing the same game, all we will end up with is more and higher FX volatility. This in turn will likely exact a toll on global trade and capital flows.”  http://www.bloomberg.com/news/articles/2015-02-06/a-stealth-war-with-currencies-as-weapons-silent-killers?hootPostID=9928ac89df631d48b04a6bafca9cade7

Australia is potential target for continued forex attacks until they go down to the unarbitrage-able negative rate zone. And the RBA can do little about it.

I think the currency has found a base, closing the week higher than last week’s close, non farm payrolls regardless, and worse still, Tony Abbott’s leadership challenge coming up next week.

It is surprising to find that the AUD dollar has been most strongly correlated on a weekly basis to the MSCI EM Forex index more than it is to any other instrument out there including commodity prices and its second best correlation to the NZD and the EUR, to an extent. (Possible common sense to buy the AUD and sell the MSCI EM FX index as a hedge given the nature of the trade flows or treat AUD as the AAA proxy for EM.)

And NZD is only riding on the “milky” high now that milk prices on back on the rise, although they could expect some challenges from Coca Cola which also unexpectedly announced recently that they will be entering the Milk market with what some dub as “Franken-milk”. http://www.3news.co.nz/business/fonterra-milk-forecast-may-lift-global-prices-2015013006#axzz3R29CbCOg

AUD SNAPSHOT

Note that economic numbers are still positive (white line) and the market positioning is still the shortest (green line) in 18 months.

AUD UPDATE

In the days ahead, I expect Australia to lose out in the currency war because they are just behind the curve and I remain bullish on the currency that has a possibility to touch 1.065-1.075 for the AUDSGD. AUD is the perfect destination for the Scandi’s, especially the largest wealth fund in the world.

Yet the USD will go on a tear next week but I think expectations will be reined in, in the face of geopolitical uncertainties with Russia, the middle east etc. which is good for commodities and oil.

Enough of my rambling and its time to hit the KTV.

Leaving with the indicative prices which are starting to look terribly uninteresting to the retail but will make eyes in Europe go round in awe (the same eyes buying those Swiss 10 year bonds at -0.11%).

aud bonds