Aussie: Is a rate cut close to in the price?

Quotable

“The G-20 policymaking community is in a situation reminiscent of the old joke about Mary Todd Lincoln: “Other than the disruption from the intruder, how did you like the play, Mrs. Lincoln?” Other than completely missing the global political dynamic as exemplified by the Egyptian and Libyan developments, what a masterful job the G-20 has done of managing the world economy.”
                                          David Smick

Commentary & Analysis
Aussie: Is a rate cut close to in the price?

If you are like most of us average humans you likely expect the Reserve Bank of Australia to continue to hike rates as far as the eye can see. But, interestingly there is another view out there, as shocking as it may be; here it is, from News.com.au.

THE Reserve Bank may start cutting interest rates by mid-year if Australia’s economy outside the mining sector does not improve, says Morgan Stanley Smith Barney investment strategy head Malcolm Wood.

In Adelaide for a client briefing, Mr Wood said the official rate of 4.75 per cent could be cut by 25 to 50 basis points by mid-year if weak economic data continued.

"We’ve been held back by the most aggressive central bank in the world and we think they’ve done their job,” Mr Wood said.

About 5 to 10 per cent of GDP growth could be attributed to the mining boom but "everybody else is paying for the boom” with weak retail, housing approvals and "sluggish” credit growth.

Economists and analysts have largely expected a rise in interest rates this year with the RBA’s last rate rise in November to 4.75 per cent, holding steady for the past three monetary policy meetings. The RBA board will meet to consider rates next Tuesday.

Hmm…we know this currency game is about how to evaluate expectations and transient rationales, so one wonders just how much of this type of view may actually penetrate into the minds of Aussie-perma-bulls?

Yield Spread 3-month Benchmark United States vs. Australia:

The yield differential for the US dollar has gone extremely down under relative to the Aussie; but as I titled yesterday’s piece, the same question applies: Is the worm turning?

As you can see in the chart above, the growing yield differential in favor of the Aussie bottomed in December 2010. Granted it is slight and the correlation between exact moves in the currencies and yield differentials is not one you can tout with confidence, but…

The question we can’t answer now is how much of this expected continued gain in yield differential is (was) factored into the Aussie? As we’ve said before, the Chinese juggernaut is due deceleration and Japan is a key export destination for Australia (which likely means quite a lull there for an interim period); some raw material for the RBA to balk.

So, do you feel like doing some top picking?

AUDUSD Weekly: Everybody loves this pair long, for a lot of good reasons. Markets top with maximum love. This one seems priced for total bliss; even a little love loss may trigger a playable correction.