RBA Pauses, But for How Long?

The Reserve Bank of Australia finally ended its hot streak and decided that current interest rate levels are appropriate. According to the bank, the decision mainly rooted from the increasing uncertainty surrounding sovereign debt in Europe. Although its effects remain to be felt, the situation in Europe will eventually slow growth in Asia and, consequently, Australia.

I guess the question that is on the mind of every Aussie trader is this: How long will the RBA sit on the sidelines before they begin to think about raising rates again? To answer this, let’s take a look at some data, shall we?

Firstly, the housing market is showing some signs of weakness, as building approvals fell by a shocking 14.8% in April, after it was expected to have fallen by just 5.2%.

Secondly, private capital expenditure by Australian firms for the first quarter showed some disappointing figures. Australian companies spending on fixed capital items (e.g. machinery) fell by 0.2% last quarter, after rising by 6.1% during the previous quarter.

And most importantly, while retail sales rose by 0.6% last April, this figure was mostly boosted a rise in food sales. Excluding food, sales increased a measly 0.1%! So much for an upside surprise…

It seems that the economy could be feeling the adverse effects of the series of the rate hikes that the Reserve Bank of Australia implemented the past six months. Remember, both consumers and businesses have a harder time obtaining credit when interest rates are raised. Without the resources to spend, home owners are reluctant to pay higher interest on their mortgages; companies find fixed capital investments to be costly; and consumers refrain from spending on non-necessities.

The combination of plateauing economic activity and debt fears from Europe will probably keep the RBA from hiking rates in the next couple of months. However, I remain confident that Aussie buying will eventually pick-up.

Just because the Australian economy isn’t doing so well now doesn’t mean it isn’t miles ahead of everyone else! Unlike other higher yielding currencies like the euro and pound, the Aussie can actually rely on its relatively rosier fundamentals to keep it afloat. At the end of the day, the FX market is all about relativity folks!