Monday, August 6, 2018

A Record 24-Month Streak for the RBA

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The Reserve Bank of Australia is set for a record 24-month streak of no change in the Australian official cash rate. The market expects the RBA to not increase interest rates as uncertainty surfaces the Australian economy. The Australian economy faced an unexpected spike in funding costs for retail banks which forced these banks to protect their profit margins and retaliate by increasing mortgage rates. This initiative fired back on banks, mortgage providers and realtors after demand for housing dropped and a price drop followed.

In July, Australian House prices dropped 0.6%, marking the biggest single month drop since seven years. Keep in mind that Australia’s household debt to income level is above 200% and an increase in mortgage rates is not encouraging for the economy. Add to that the fact that the latest CPI release came lower than expected at 2.1% relative to the 2.2% consensus figure.

In addition to the interior economic conflicts in the country, Australia also faces exterior pressures. The China-U.S trade war conflict is expected to curb growth in China and this will reflect badly on the Australian economy given that China represents over one third of Australian exports. Another exterior negative issue is the drop in commodity prices. On a year to date basis, prices of the two major Australian commodity exports Iron Ore and Gold dropped over 5%.

Given the above, the Australian Dollar is expected to continue its drop and the RBA statement is predicted to be the main catalyst for a break below the 7-week range between 0.7310 and 0.7480.

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