News Article | April 8, 2015
While investors are betting the Reserve Bank of Australia will deliver additional easing to lift an economy hit by the commodities slump, the central bank chief disappointed them this week by leaving the cash target unchanged at 2.25 percent. As he weighs the effect of 2.5 percentage points of reductions so far, he can’t help but notice house prices are buoyant, household debt is rising and borrowing by non-resource businesses is beginning to grow. The RBA “judged that it was appropriate to hold interest rates steady for the time being,” and will assess the case for additional cuts at future meetings, Stevens said in his statement Tuesday. With iron ore lingering below $50 a ton for the first time in at least a decade, unemployment near a 12-year high and business sentiment in the doldrums, traders are betting that another cut is almost certain by June. The following charts illustrate the balancing act RBA policy makers face and some of the indicators that may have given them reason to prolong their pause in the face of a market that had priced in a 75 percent chance of an April easing. CHART 1. Sydney housing prices are rising “strongly” even as the prices of some commodities have fallen off “sharply,” Stevens said this week. The residential property price gains in the nation’s most populous city have spurred concern that RBA stimulus may be overheating the market, while the price of iron ore has collapsed 60 percent over the past year, creating a drag on Australia’s economy. CHART 2. The RBA’s rate cuts have driven corporate bond yields to record lows and, as the central bank noted Tuesday, lending to businesses has been strengthening. CHART 3. While there has been a sharp drop-off in capital expenditure by the mining industry, other parts of the economy are increasing their spending. CHART 4. Despite this, the “animal spirits” that Glenn Stevens has sought to summon are far from abundant in the world’s 12th largest economy. With confidence languishing and unemployment high, investors are betting rate cuts are a matter of time.
News Article | April 13, 2015
The prospect that an ever-bigger plunge in iron-ore prices will wreck Australia’s budget is adding to pressure for the central bank to cut interest rates further. The country’s biggest export has plummeted 58 percent to $49 a ton over the past year, taking an ax to federal revenue. Treasurer Joe Hockey said in an interview with the Australian Financial Review that $35 is a level he’s contemplating for the budget he hands down next month. Citigroup Inc. sees prices averaging in the $30s in the second half of 2015. Such levels could mean a blowout in deficits Hockey had hoped to rein in. While the treasurer was quoted as saying he doesn’t want the budget to “arm wrestle” with monetary policy, his ability to help the economy with fiscal stimulus would be curtailed. More of the heavy lifting would fall to the Reserve Bank of Australia, which has already cut its cash rate to an unprecedented 2.25 percent and said more easing may be appropriate even as house prices soar. “The whole country seems to be suffering” as iron ore slumps, said Annette Beacher, a Singapore-based economist at TD Securities. “The closer we get to the budget and the more we realize the budget is in trouble, pricing a 1.5 percent cash rate is certainly not out of the question.” While Beacher thinks the RBA is reluctant to go below 2 percent unless all other avenues have been exhausted, the swaps market is already pricing in at least half a percentage point more in easing by October, and a 75 percent chance the reduction to 2 percent will come next month, according to data compiled by Bloomberg. The following charts illustrate how the country’s fiscal and monetary policies have historically worked in tandem, the impact of plunging iron-ore prices on national income and the fallout from a slowdown in China, the country’s biggest trading partner. CHART 1. Australia’s budget deficit as a percentage of gross domestic product has tended to move in the same direction as the RBA cash target. Bigger deficits on the cards may also signal further easing from the central bank. CHART 2. The extra iron ore Australia is now exporting to China has helped drive the decline in prices. The additional tons shipped aren’t generating enough money to make up for the price reduction, and that income deterioration may worsen. CHART 3. Chinese growth, which is forecast to slow to a year-on-year pace of 7 percent in figures due this week, is creating headwinds for commodity prices. For Australia, a depreciation of the currency might provide some relief, although the RBA has said the local dollar remains too high to help the economy.
News Article | January 4, 2015
Australian lending to business growing at the fastest pace in almost six years may herald the stirring of “animal spirits” that central bank Governor Glenn Stevens has been seeking. Loans to companies increased 4.6 percent in November from a year earlier, the Reserve Bank of Australia announced on New Year’s Eve. That was the most since March 2009, when the rate was boosted by comparison with a darkening world economy as the global financial crisis loomed. Business lending growth “will be an important marker of prospects for a non-mining capital expenditure and hiring recovery in 2015,” said Ben Jarman, an economist at JPMorgan Chase & Co. in Sydney. “RBA officials have bemoaned a lack of ‘animal spirits,’ which is restraining appetite for corporate expansion and real investment.” The revival in credit growth, and a weakening currency that improves the competitiveness of manufacturers, may allow the central bank to stand pat for longer after cutting its benchmark interest rate to a record-low 2.5 percent. The pickup in business lending also opens a new growth channel for Commonwealth Bank of Australia and National Australia Bank Ltd., which have been relying on a housing boom for profits. Mortgage growth has provided succor to Australian lenders in the past two years, growing at more than double the pace of business credit, RBA data show. Outstanding home loans averaged a 5.4 percent increase in the two years to Nov. 30, compared with a 2.4 gain in corporate credit, the data show. “Business confidence seems to be coming back, which is a good sign for the banks this year,” said T.S. Lim, a banking analyst at Bell Potter Securities Ltd. in Sydney. “They have been far too reliant on home-loan growth in recent years. Business loans bring with them higher margins and clearly diversifies earnings.” The Australian dollar’s weakness is assisting some companies. The Aussie slumped 8.3 percent last year, after sliding 14 percent in 2013 as the economy adjusted to waning mining investment that has driven almost 24 years of uninterrupted growth. The currency was at 80.85 U.S. cents as of 11:30 a.m. in Sydney, after earlier reaching a 5 1/2 year low of 80.53. Stimulus to consumers has arrived at gas stations after the oil price tumbled 46 percent in 2014. “Aussie consumers and businesses are borrowing -- but in a measured way,” said Craig James, a senior economist at the securities unit of Commonwealth Bank. “Still, that means the Reserve Bank has no reason to be either lifting or cutting interest rates at present. The weaker Aussie dollar and lower petrol prices are providing solid stimulus to the economy.” Seven economists, including Westpac’s Bill Evans, who correctly predicted the previous easing cycle, are calling for further rate cuts this year as unemployment increases. Another nine analysts see the RBA raising borrowing costs, while 11 expect them to be unchanged. The benchmark 10-year government bond yield fell 1.5 percentage points last year to 2.74 percent. It was at 2.75 percent today, compared with the record-low of 2.698 percent reached in June 2012. Traders are pricing in 41 basis points of rate cuts this year, according to swaps data compiled by Credit Suisse Group AG. The central bank’s board said in minutes of its December policy meeting that members noted the market’s outlook “and discussed the factors that might be producing such an expectation.” It reiterated the outlook for a period of rate stability. Economic growth slowed to 0.3 percent in the third quarter, the weakest in 18 months, the government said Dec. 3. Expansion was supported by property price gains in Sydney and Melbourne that spurred a building boom. The heat is coming out of the market as data Jan. 2 showed the annual increase in nationwide home prices was the lowest in 14 months. “The growth rate of home prices is easing to more sustainable levels -- not a boom and not a bust,” Commonwealth Bank’s James said. “The doom sayers will need to find something else to worry about.”
News Article | January 26, 2015
Asia’s wealthy are falling out of love with the Aussie dollar as record-low yields and sustained declines persuade them to look elsewhere, according to UBS Group AG. Many of the bank’s wealthiest clients in the region began to abandon the currency as Australia’s bond yield premium over the U.S. slid and the Federal Reserve discussed raising interest rates, said Simon Smiles, Zurich-based chief investment officer for ultra-high-net-worth individuals. The 10-year yield is 74 basis points above that of the U.S., down from 130 a year ago. “Two years ago when I came to the region, in most client meetings, people were asking about Aussie assets, the Australian dollar, yield play; when you talk about it now, there’s almost no interest,” Smiles said in an interview on Monday. “From the third quarter of last year, there’s a growing belief that the U.S. dollar would start a sustained appreciation trend.” The Aussie has tumbled 16 percent in the past six months to the weakest level since 2009 and Reserve Bank of Australia Governor Glenn Stevens has said he expects it to extend declines. The local dollar has fallen less than the euro and the currencies of Denmark, Canada and Norway this year and “should be the next domino to fall,” said Olivier Korber, a strategist at Societe Generale SA in Paris. Australia has been struggling with the end of a once-in-a-century resources boom and a slowdown in China, which buys more than 35 percent of the South Pacific nation’s exports. A Deutsche Bank AG index tracking the prices of commodities important to Australia has tumbled 30 percent in the past 12 months with iron ore and thermal coal sliding to multi-year lows. China’s economy grew 7.4 percent in 2014, the slowest pace in 24 years. The expansion will weaken to 7 percent this year, according to the median estimate in a Bloomberg News survey. “The biggest structural concern for Australia and the currency is probably the landing of the Chinese economy amid falling commodity prices,” Societe Generale’s Korber said in an e-mail interview on Jan. 23. Australia’s dollar is set to end the year at 77 U.S. cents, he said. An earlier-than-expected decline below this level may accelerate its descent toward 70 cents, he said. The Aussie was little changed at 79.24 cents at 12:42 p.m. in Sydney after declining on Monday to 78.55 cents, the weakest since July 2009. Forecasters see it ending the year at 78 cents, according to the median estimate in a Bloomberg survey. The Bank of Canada’s unexpected decision to cut interest rates last week and the European Central Bank’s announcement of a bond-purchase program have spurred traders to increase bets the RBA will also loosen monetary policy. There’s a 40 percent chance it will lower borrowing costs on Feb. 3, up from about 25 percent odds on Jan. 16, interest-rate swaps show. Central bank chief Stevens last month signaled the cash rate will remain unchanged for the foreseeable future. The currency will probably extend losses this year, he said in an interview with the Australian Financial Review published Dec. 12, saying a level of 75 cents would be better than 85. “The weaker Australian dollar is easing monetary conditions for the RBA,” David Forrester, senior vice president for Group of 10 foreign-exchange strategy at Macquarie Group Ltd. in Singapore, said on Monday. “The RBA would prefer to ease monetary conditions via the currency rather than having to cut rates and risk generating asset bubbles.” Yields on Australian five-year inflation swaps, which signal expectations for consumer prices, dropped to a five-year low of 2.12 percent on Monday, toward the lower range of the central bank’s inflation target of 2 percent to 3 percent. A further decline in the Aussie will depend on what the Fed says about the U.S. dollar at its two-day meeting starting today, Forrester said. While Macquarie expects Australia’s currency to weaken to 78 cents in three months, there’s a risk the Fed “could talk down” the U.S. dollar, providing a respite for its Australian counterpart, he said on Jan. 26. Bloomberg’s dollar gauge is set for its seventh monthly gain as the Fed moves toward raising interest rates. Some 45 percent of 53 economists in a Bloomberg survey said the central bank will raise the benchmark lending rate in June. Six percent said July, while 30 percent said the Fed will wait until September for the first increase since 2006. Fed officials last month said they expect to raise the rate this year. “The Australian dollar has fallen on a total return basis, lost people money and there’s an expectation that it will continue to depreciate,” UBS’s Smiles said. “Clients see it as a fairly compelling reason not to be invested there.”
News Article | February 3, 2015
For a move that had been priced in, the Reserve Bank of Australia’s decision to lower the overnight cash-rate target drew outsize reactions across asset classes. Overnight indexed swaps traders who saw better than 60 percent odds for an RBA cut were proved right, as policy makers reduced the benchmark to a record-low 2.25 percent. As the attached chart shows, Australia’s bond futures rose to records, stocks reached highs last seen before Lehman Brothers collapsed and the Australian dollar plummeted almost 2 percent to a more than 5 1/2-year low. “The market was on edge, so volatility was really high,” said Chris Weston, chief market strategist at IG Markets Ltd. in Melbourne. “What we’ve seen today is a really positive day for Australians and people who have invested in certain assets in Australia.” Part of the exuberance was driven by prospects that today’s rate cut will be followed by at least one more, possibly as soon as March 3. Interest-rate swaps traders are seeing a 63 percent chance the RBA will take action again.