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In the game of economic chess RBA appear on the back foot


Glenn Stevens’ speech was always going to attract a lot of attention from traders, in light of the recent turmoil from China. The question on traders’ minds is if the recent turmoil in China is going to result in a further rate cut from RBA. My guess is that it will. 

It had been hoped he would shed some light on monetary policy as futures markets are now pricing in a rate cut in December. But, in true Stevens’ style, he kept traders guessing. The Aussie had edged lower to 71c as he took stage but bounced to a high of 0.7127 as eager-bears removed their short positions, disappointed with the lack of dovishness.
RBA have both China concerns and the FED’s much [over]-hyped rate hike, alongside mundane domestic conditions, to consider any future monetary policy . With China being a key trading partner with Australia then any slowdown will have a negative effect on domestic growth, whilst a lower Yuan merely exacerbating the problem. At the same time RBA have been waiting for FED to do the heavy lifting by raising US interest rates.
Failure for FED to raise interest rates over global growth concerns will come back to haunt the RBA. An overlooked section on every FOMC statement this year has been on the closing paragraph. “…even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the committee views as normal…”. I strongly suspect recent China doubts warrants FED to keep rates on hold for “some time”. 

In the game of economic chess RBA appear to be on the back foot here, and likely to cut rates in 2015 to get ahead of the curve. 
The renewed concerns over China remove a FED September rate in my view, and we may not even see one at all in 2015. This immediately puts pressure on RBA to cut rates to fend a weaker Yuan, slower Chinese growth and weaker greenback (which would send the Aussie Dollar higher). Besides, the much-hyped rate rise is likely already priced into the Greenback, so I expect to see the US Dollar weaken in September regardless of whether they raise interest rates or not. It’s more a question of how hard the USD falls, over if. 

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