Australia Jack Up Interest Rates

Currencies Direct Reviews – Australia Jack Up Interest Rates

6, October 2009

As had been anticipated for some time now Australia became the 1st of the OECD countries to raise their official interest rates since the global introduction of the far reaching stimulus measures and historically low interest rates that followed the financial meltdown in 2008. Australia can not claim to be the very first nation to move, Israel took that honour but is the first economy of significance to have taken steps to reverse the easy monetary conditions.

In raising their rates from the 49-year low ‘emergency’ rate of 3% to 3 1/4%, Glenn Stevens, the governor of the Reserve Bank of Australia, said that economic conditions in the country are now stronger than had been expected whilst measures of confidence have recovered. The RBA made it clear in the statement that this would be the first of a series of interest rate increases and the likelihood is that official rates will be nearer 4% than 3% by year end. The move is obviously a very strong indicator that the Australian Treasury feel that economic recovery in China and the Far East is a done deal and the chances of a double dip recession, remote.

Back to normal yesterday with a very strong ISM number from the US creating a rush into equities and a drop in the dollar’s value. The ISM’s index of non-manufacturing businesses, which make up almost 90% of the economy, rose to 50.9 (50.0 expected) from 48.4 in August – the first expansion in a year. The FTSE surged to close above 5000 and the DOW and S&P 500 both rose sharply.

The weakness in the Dollar has been maintained overnight and cable has broken back up through 1.6000 this morning, although sterling itself is weaker against the euro, for which the multitude of tests at 1.4550 and then 1.4500 now seem a long distant memory. The sentiment towards the Dollar has been helped by an article in this morning’s Independent newspaper talking of the currency’s demise. It claims that secret meetings have already been held between finance ministers and central bank governors in the BRIC nations plus Japan to work on a scheme which will mean that oil will no longer be priced in US Dollars. p>

Discussions between the above countries, oil producing nations in the Gulf and, apparently, France centre on dealings in crude being priced against a basket of currencies which will include the Yuan, the Yen, the Euro, Gold and a new, unified currency planned for nations in the Gulf Co-operation Council, which includes Saudi Arabia, Abu Dhabi, Kuwait and Qatar. Both the new Japanese Finance Minister, Fujii and the Saudi Central Bank Head have been quick to deny the report with the latter stating that the content was ‘absolutely incorrect’. This has had the effect of putting the brakes on the Dollar’s decline and with little or no significant data scheduled today, I would not expect to see the major crosses move very far from here.

That said, there are still items of interest for the markets to take on board. The UK DMO are auctioning £5 billion of 2013 gilts this morning (this following the furore over the FSA’s plan to require UK banks to hold an extra 110 billion pounds in government bonds in a bid to prevent a repeat of the banking crisis) and the US Treasury are scheduled to sell 39 billion dollars of 3-year notes this evening. With treasuries’ yields looking to head down to beneath 3% expect the auction to attract plenty of demand.

The other headline maker this morning is Latvia, and more specifically the fragile state of its economy and the knock on effect that a ‘failure’ would have in Europe, and more specifically, Sweden. The Swedish banks have by far the largest exposure to the Latvian economy and a fall out would have dire consequences for their already weakened balance sheets. The Krona looks vulnerable to adverse news.

Comments from Mr Fujii following the G7 meeting at the weekend indicate that the weakness of the Dollar had been discussed by the participants but that he had made it clear that a weak yen policy was not a desirable option for the Japanese. The outlook for the Dollar is still uncertain however given affirmation from the NY Fed’s Dudley that low rates will persist for an extended period.

Last comment on currencies; UK Industry Secretary, Mandelson is quoted as saying that a competitive exchange rate would boost exports in a desirable and timely way. Interesting use of tense here and similar in context to the comment made by Mervyn King that put the skids under the Pound a couple of weeks ago.

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Compiled by Tom Nadir.

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