Experts accurately predicted today’s decision as the Australia RBA Rate Decision Market Impact Analysis shows the official interest rate at 1.5 percent for a 16th straight month.
5 December, Swissquote – The RBA Cash Rate Target has been maintained again at 1.50%. It is now the 16th consecutive months in a row that the rates is held at this level. It has also been since 2010 that the rates have not been increased.
At this rate level, we cannot consider that the housing market, one source of the issue, will be soon cool off. On top of that markets have strong expectations that rates will remain on hold until at least 2019.
Australia RBA Rate Decision Market Impact Analysis
Yet, economic conditions look mixed. The low inflation and the low wages growth are preventing any rate hike in a near future despite forecasts from the Australian central bank. The RBA Governor mentioned that debt levels are high. Is this possible that this is actually the main reason for holding rates so low? We could hardly believe it.
The era of free money has created and is still underpinning bubbles in all asset-class. Raising rates may trigger a massive bubble burst. We note that the Australian debt levels went from 15% to 45% of the GDP since 2009 (much sustainable than most of the G10 countries).
The Aussie is getting lower against the greenback and will likely continue to do so. The RBA will likely follow major central banks and not lead the move of monetary policy normalization. This is why we believe that the Aussie has some more downside room within the medium-term.
No breakthrough – Sell GBP
One of our core themes for 2018 will be the ascensions of the EU from a fragile union to a unified political and economic force. We can see the start of this transformation in the current EU/UK Brexit negotiations. British Prime Minister Theresa May and European Commission President Jean-Claude Juncker failed to make progress after hours of discussion with differences over Irish border proving the recent barrier.
Externally members expressed confidence that a deal would arrange in time to allow EU policymakers to focus on the future trade relationship. However, internally the mood is more apprehensive. According to internal sources, talks will resume later this week. Despite all the progress made in the Brexit negotiations, there is feeling that the EU is taking difficult position and the UK bending (highlighted by the divorced bill concessions).
EU Council meeting
We see a deal unlikely at 14-15 December EU Council meeting. Bullish EUR exposure was paired backs and GBP long increased on speculations of a breakthrough in negotiations. Short-term traders were caught on the wrong side, as negative news flow hit the wires and EURGBP rallied back to 0.8848.
Give our long-term theme of a strong EU we suspect the risk rewards favors long EURGBP fading Brexit positive news. The Irish border issue will find an ordinary solution but there will be another blocker right around the corner. And negotiators have not even got to the difficult part (trade). We have increased our view for a “hard” Brexit. EURGBP is holding around the 200d MA with a clear close above 0.8850 triggering a bullish extension to 0.8879 (55d MA).
This article ‘ Australia RBA Rate Decision Market Impact Analysis ‘ was written by Peter Rosenstreich and Yann Quelenn, Market Analysts at Swissquote.
While every effort has been made to ensure that the data quoted and used for the research behind this document is reliable, there is no guarantee that it is correct, and Swissquote Bank and its subsidiaries can accept no liability whatsoever in respect of any errors or omissions, or regarding the accuracy, completeness or reliability of the information contained herein.
This document does not constitute a recommendation to sell and/or buy any financial products and is not to be considered as a solicitation and/or an offer to enter into any transaction. This document is a piece of economic research and is not intended to constitute investment advice, nor to solicit dealing in securities or in any other kind of investments.