Newsflash: “Wait-and-See Flu” Hits RBA

The “wait-and-see” sickness has finally got to the Land Down Under. Yep, you heard me… In a surprising move, the Reserve Bank of Australia recently announced their decision to keep the interest rate unchanged.

In the rate statement, RBA Governor Glenn Stevens said that he first wants to see the effects of the previous rate hikes before moving forward. It appears that Stevens is concerned that the country isn’t doing as well as they hoped.

It wasn’t all dovish, though, as the bank believes that interest rates of most borrowers are still lower than the average. Because of this, the bank said that they would most likely adjust their monetary policy further over time. Of course, this is assuming that the country’s economy, in Stevens’ own words, “evolves broadly as expected.”

This rate statement was a bit of a downer, since almost everyone was expecting another rate hike this month. And who could blame them? There were plenty of signs pointing to more aggressive moves by the RBA.

First, there was the huge leap in employment and consumer confidence, hinting that further economic growth is in the cards. According to the latest jobs report, employers pumped up hiring by an additional 137,000 during the last quarter of 2009. Second, the double-digit GDP growth of China, Australia’s major trade partner, bodes well for the Land Down Under’s exports and overall economic growth.

Lastly, price levels have already been rising and, given these prospects for further economic expansion, inflation could surge out of control unless tightening measures (a rate hike, in other words) are implemented. In particular, many have expressed concern about the unprecedented increase in house prices since this might pave the way for an asset price bubble. Raising borrowing costs seemed to be the perfect move to cap these price increases but the RBA decided against it.

Early on, investors were positioning themselves ahead of the predicted rate hike, naturally pushing the Aussie higher. But when the tweet of the RBA’s official decision got out, it was to no surprise that traders scurried to dump the Aussie. The currency fell sharply across the board like it was standing on a sinkhole. The dollar, yen, and even the exotic currencies like the Philippine Peso mustered some gains over the Aussie.

Safer currencies like the dollar and the yen completely erased their earlier losses soon after the decision was made public. The AUDUSD slid from 0.8906 all the way down to 0.8807 in just one hour! Similarly, the AUDJPY fell abruptly from 81.00 to a low of 79.76 in the same amount of time. Needless to say, Aussie bulls got toasted pretty badly. Ouch!

Judging from the initial reaction, if the RBA continue to keep rates steady traders may become more bearish on the AUD. Remember, one of the advantages that the AUD had over other majors was that it had a high yield, making it one of the major benefactors of the carry trade. Not to mention, they were one of the few economies to actually avoid a recession, pushing them to the forefront of the race to recovery.

The question is: What’s the outlook for the Australian economy? As I pointed out a few weeks back in the previous article that I wrote, things aren’t looking so bright anymore for the Australian economy, as lending conditions are fragile (due to higher interest rates) while China is making moves to curb growth. If Australia’s prospects continue to worsen, we may see risk aversion creep back in. Now we all know what this could mean – the AUD going Down Under at least in the short term.