Notes From Underground: The RBA Will Announce Its Rate Intentions. Should We Care?

Tonight at 11:30 CST, the Reserve Bank of Australia (RBA) will announce its interest rate intentions. Readers of NOTES know that I place a high value on the RBA as a barometer of the global macro economy. Australia’s huge trade with China provides the best look at the Asian growth story as Australia’s reserves of natural resources provides China with its own COMMODITY HOME DEPOT WAREHOUSE. During the last 12 years, massive foreign investment has poured into the energy, mining and agricultural sectors of the AUSSIE economy and provided the best consistent growth of any of the developed economies.

As usual, Governor Stevens’ view on the state of the global financial system will be important but there is something going on in the Aussie interest markets that demands our attention. The AUSSIE curve is inverted on the short-end as the overnight rate is 3.5% and the 2-YEAR AUSSIE NOTE is 2.88% resulting in an inversion of 62 BASIS POINTS. The Aussie 2/10 CURVE closed at a very flat 36 BASIS POINTS. Remember, this is for the developed economy that is considered the healthiest. If the flattening is indicative of a perceived slowing in China, then Governor Stevens will have the reason to cut rates and surprise the market. When the AUSSIE CURVE WAS INTO 55 to 60 BASIS POINTS in May and June of this year, the RBA cut the OIS 50 BASIS POINTS IN MAY and a further 25 BASIS POINTS in JUNE.

Now that the 2/10 CURVE IS 36 POINTS POSITIVE I WOULD ANTICIPATE THE AUSSIE’S CUTTING THE INTEREST RATE. Consensus is for no change but if the rate is cut, have support levels in place to see where the support levels for the AUSSIE DOLLAR should hold. But I’ve never been one for consensus when the facts say otherwise.

***Staying with the YIELD CURVE SCENARIO, Spain and Italy both continued to STEEPEN as SPANISH 2-YEAR NOTES FELL ANOTHER 43 BASIS POINTS and the 2/10 widened further to 328 POINTS. Italian 2-year notes dropped another 7 BASIS POINTS and the yield was 3.0004%. The 2/10 for Italy was a very robust 295 basis points. Ireland’s 2-year note yield dropped to 2.57% indicating further short covering in the short end of the peripheral sovereign debt markets. Steepening curves continues to be the story of easing of the stress in Europe, but Mario Draghi cannot rest on this short-term victory. The cauldron of EUROPEAN POLITICAL ECONOMY CONTINUES TO SIMMER and the voices of the pro-BUNDESBANK FORCES ARE INCREASING IN VOLUME. If the DRAGHI ECB is to battle the Bundesbank President Weidmann  for control of EU monetary policy, the battle must be sustained and continued monetary action is called for. No rest for the weary.

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