I appeared live on Channel News Asia on Tuesday morning at 6:20am SGT. My questions and my responses in the form of brief notes are below:
Q1. Stuart, what can we expect from the Australian market when it opens for trade this morning?
Probably not a lot. The index has struggled the last week or so drifting below the key 5400 level and it is now trying to hold on and stay within reach. We have a slightly positive lead from US and European markets so we may see a small rally but perhaps more just some consolidation.
My sentiment indicator has dropped to its lowest level since October 2014 so the index is really struggling – http://www.stuartmcphee.com/spasx-200-sentiment-slumps-to-2015-low/
Q2. The Reserve Bank of Australia will release the minutes of its August policy meeting today. Is the risk for a more hawkish-than-expected tone?
It is possible. A couple of weeks ago we saw a change in tone from the RBA who have clearly moved from an ‘accommodative easing’ bias to ‘neutral’.
Stevens said the exchange rate “is adjusting to the significant declines in key commodity prices” after it fell through 73 U.S. cents last month. It is the first time since early last year that he hasn’t referred to the currency as being too high.
I wouldn’t get too excited and expect the RBA to be jumping with joy about the state of the economy but we may see a little more optimism than previously.
Q3. What’s the likelihood of an interest rate cut by December?
Like any central bank, they generally take a longer term view on everything and whilst not immune, they don’t tend to make knee-jerk reactions. So whilst it is possible that they could cut again, I think it is unlikely, especially given their recent change in tune.
It is also worth remembering that by Australian standards, the current cash rate at 2% is very low and whilst there is still room to move, the RBA would be moving into uncharted territory.
With the release of the minutes of its August policy meeting today, I think we are likely to get a clearer picture.
Q4. Is the Australian dollar at risk of weakening further in the coming months as global growth slows, commodity prices slide and interest-rate differentials with the US narrow?
There remains a risk however I think the AUD/USD has already taken the brunt of these drivers. Last year the AUD/USD fell strongly from around 0.95 down to 0.75, and more recently it has done well over the last month or so to arrest the slide and consolidate around 0.74. Over the last 12 months, alongside the Canadian dollar, the Australian dollar would be the worst performing currency.
It has been widely published that the Fed are intending to raise U.S. rates soon, perhaps as soon as next month. We have seen strong appreciation in the US dollar through this year and therefore it is highly likely the Fed’s upcoming decision has been largely if not completely priced into the market.
As RBA Governor Stevens said that the exchange rate “is adjusting to the significant declines in key commodity prices” along with the Fed’s well known intentions, the AUD/USD may not have that much more to fall.