Markets got a bit of a surprise overnight as the Reserve Bank of Australia again slashed its key interest rate by yet another 25 basis points. That brings it to a record low of 2.75% – and the absolute lowest I can imagine it going for some time.
The Aussie (AUD) got absolutely pounded across the board overnight – losing ground to practically ever single currency on the planet. With troubling data coming out of China (Australia’s biggest trading partner) “fundamentally speaking” this can’t be seen as very good news. The AUD was only a short time ago yielding 4.75% and has taken a 200 point haircut over the past 18 months .
Short term we can see the selling pressure in AUD is obvious, and will likely provide some trade opportunities on the long side – however, I would be very cautious and not rush into anything there. Looking longer term I see this as yet another sign that the Global Economy is no doubt retracting – and that even the “best of the best” ( as Australia is generally seen to have a solid economy) are making moves in preparation.
I see the USD rolling over again here this morning as suggested and will watch closely – although commodity currencies such as AUD and NZD have also been selling off so once again – a very difficult fundamental background.
Hey Kong,
Good analysis again as usual, however I think you view on the AUD irate is a little off. Many of us downunder here believe there is at least one more rate cut, maybe in 2-3 months time. There is no doubt is slowing and commodity prices will remain pressured.
So while from today its a little cheaper to hold short AUD positions as the yield differential narrows, there could be more to follow.
Deano….you (obviously being on the ground) have it right on the money.
Another rate cut in 2-3 months “IS” a long time for me….I too believe another cut is in the cards.
Interestingly – what will the fundamental backdrop be 3 months from now? – and how will the market “perceive” that cut?
This time around….I’m thinking these “teflon markets” may take the cut as a good thing ( further stimulation ), but question that perhaps 3 months from now we may see a different outcome.
Great input man – so appreciated in that I see real value in truly “being there” when looking at a countries fundies etc.
Chime in here any ol time – all input truly appreciated!
Hey Kong,
Thanks for the reply. Fundamentally in 2-3 months the outlook will be a little worse than now but not poor. The govt delivers the annual budget next week and we have a shocker budget deficit to handle (circa $12b – a lot for Australia, with larger deficits to follow as tax receipts tank), which will likely slow growth a little going forward as ham fisted attempts are made to address it, especially with an election in September and a crap govt to replace.
The markets have perceived the cut as good but necessary to try and stimulate the economy. Trouble is it probably won’t work as we Australians have a morbid habit of looking on the dark side of everything which will keep confidence low, and with China slowing another rate cut is already being factored in for Jul-Aug. A second cut will further reduce the yield attractiveness and should cause the AUD to drop below parity, so the long term trend remains down, but as usual with the AUD (and NZD) their teflon coats will result in a slow and choppy descent.
Cheers.
Thanks again Deano – you’ve got great insight. MUCH appreciated!
I am all too often accused of “looking on the dark side” and in all honesty – never imagined that as an “Aussie character trait”!
I think “realism” is all too often mistaken for “pessimism”.
Go man go – keep the Australian connection goin!
No probs Kong, happy to be a sounding board for things south of the equator 🙂
Hi Kong,
First, a compliment – I’ve been following your blog since about the beginning of the year and just wanted to say that I’ve really enjoyed the personality, content and tone of the site. Kudos.
Second, I (like you) have been expecting ………at least a correction……in equities. However, the market continues to march on…..past time targets………and past price targets. Print, print, print. Grind, grind, grind.
What do you make of the defiance to divergences?
Simfly!
It’s like you’ve read my mind ( with respect to the recent post ) as that – I’ve had it!
The divergence and “hilarity” surrounding the markets continuous move higher has seriously gotten out of hand…and it gets harder for me to comment day to day – as most people generally just want to hear the same thing as the T.V – buy buy buy – everything is going up forever , nothing to worry about etc…
I think it’s killing this blog to a certain degree in that……I can only “say it like it is” – but the majority of readers likely only want “rainbows and happiness” in their email box. I imagine the door will get beat down here when things head south with all of those searching for answers – all too late.
I likely won’t have another bullish view for a considerable amount of time, and have now put the challenge out there – this gorilla gets more bearish by the minute.
And hey – thanks for the compliments on the blog, I really appreciate it.
I rattled off my views (more or less) in the last comment response to “NfxTrader” on the most recent post, regarding the Fed’s “coralling” of investors – leaving little for investment options – short of the stock market.
Interestingly……check out copper prices as well as raw lumber. (some decent economic indicators)
How can there be a “housing boom” while the price of lumber has literally cratered over the past months?
The 85 billion a month is doing a wonderful job of papering over the reality of recession. How long it can last? I’m already past understanding.