Matt Windle – St George Bank
Another month has passed and with it, another RBA meeting. After leaving rates on hold for March, many pundits were in two minds as to whether the RBA would resume the easing of monetary policy and hold on to their ammunition for a later date. There were strong arguments for both, but a 25 basis point cut was the ultimate decision. Despite significant stimulus yet to flow through the system of late, the RBA made their decision based on the potential further deterioration of global conditions.
The major concern moving forward for the domestic economy is the weakening demand for labour in Australia. Data for the month of March saw unemployment reach 18 year highs, jumping 0.5% to 5.7%, which has reinvigorated thoughts of another rate cut by the RBA in May.
With inflation now being reigned in and moving towards the RBA’s target band, there is less and less argument against further cuts in official interest rates, should they be needed later in the year. One of the influences on this will be the banks’ ability to pass on rate cuts in the face of increased funding costs in offshore markets.
It is not all doom and gloom however. We have seen a resurgence of equity markets of late with the ASX 200 up almost 18% from its lows earlier in the year. This is primarily due to the decline in risk aversion as investors seem to have more confidence in the economic environment, despite risk aversion being at historically high levels.
On the Aussie Dollar front, we have seen a dramatic recovery since early March when it was below 63 US cents. This has been on the back of improved equity markets and commodity prices, and we have seen the Aussie move over the 70 cent mark for the first time since January. Does the local currency have the ability to continue its appreciation? It is very difficult to determine at this point, but much like the equity market, the AUD is heavily linked to risk aversion and a healthy global economy.
If the gradual improvement in financial markets continues, we may see the AUD hold its nerve and move towards its long term average later in 2009. For exporters, this may be a good opportunity to look at hedging products to limit their exposure to adverse currency fluctuations, and ensure that their pricing remains competitive globally. It is also important for exporters not to use the recent lows in the Aussie Dollar for their costing, but more prudently the long term average around 77 cents.