RBA may hold rates at this week’s meeting

The RBA will be deciding this week on whether to cut the interest rate from 2.5%. Although, there exists a low probability that the RBA may cut interest rates, this will ensure a cheaper Aussie Dollar as it is still very high by historical standards. Judging from previous meetings the RBA could wait until the Fed tapers QE and raises interest rates to help devalue the Aussie Dollar. Although, the RBA may change interest rates according to the health of the economy if they are not playing the waiting game. Economic growth depends on the mining industry in Australia and a cheaper Aussie dollar will help increase profits and boost growth. In addition, due to the geopolitical risks such as Ukraine and Russia, this has helped prop up the Aussie Dollar. The Aussie Dollar, Yen and gold etc. are considered as safe havens (demand increases due to uncertainty in markets), demand increases during times of uncertainty. Private capital expenditure has increased (Actual: 1.1%, Forecast: -0.6%, Previous: -2.5%, 28/08/2014) showing signs that the economy is expanding. GDP q/q (Forecast: 0.4%, Previous: 1.1%, 03/09/2014) should be on or above forecast due to the high Aussie Dollar which has hurt exports.

The US is enjoying a promising recovery, with growth excelling (Prelim GDP q/q, Actual: 4.2%, Forecast: 3.9%, Previous: 4.0%, 28/08/2014). In addition, CB consumer confidence (Actual: 92.4, Forecast: 89.1, Previous: 90.9, 26/08/2014) showing signs that consumers have full faith in the recovery. One major concern is personal spending fell (Actual: -0.1%, Forecast: 0.2%, Previous: 0.4%, 29/08/2014) and income fell (Actual: 0.2%, Forecast: 0.3%, Previous: 0.5%, 29/08/2014) whilst prices of durable and non-durable goods stayed constant (Core PCE price index m/m, Actual: 1.6%, Previous: 1.6%, 29/08/2014). This signals that there exists a significant divergence between wages and inflation, which needs to be addressed by the Fed. In addition, the Core PCE price index m/m is below the 2% benchmark inflation rate set by the Fed, which allows the Fed time to cut slack in the labour market. The most important data releases this week are ADP Non-Farm Employment Change (Forecast: 216K, Previous: 218K, 04/09/2014), Non-Farm Employment Change (Forecast: 222K, Previous: 209K, 05/09/2014) which will show us the current slack in the labour market. It will also provide an insight on the timescale when an interest rate hike will be implemented (before mid-2015).


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