CFDs are a leveraged product and can result in losses that exceed deposits. Trading CFDs may not be suitable for everyone, so please ensure you fully understand the risks and take care to manage your exposure.

RBA puts the cue in the rack for 2015

What a beautiful story the Melbourne Cup turned out to be, with the horse being a rank outsider trained in central Victoria and bred in New Zealand. It was ridden to victory by the first female jockey to win the Cup who has had about as much adversity as one could have. Fantastic story and a fantastic endorsement of what can be achieved.

CFDs are a leveraged product and can result in losses that exceed deposits. Trading CFDs may not be suitable for everyone, so please ensure you fully understand the risks and take care to manage your exposure.

With the nation glued to the Cup, you may have missed the fact that the Reserve Bank of Australia (RBA) has practically put the cue in the rack for 2015. The interbank market all but agrees with this statement, pricing in a 31% chance of a 25 basis point move in December from an 80% chance before the statement was released.

However, it has laid out issues facing the economy and its decision making, suggesting the 2 February 2016 meeting is in play.

Key points:

  • Global growth – at a ‘moderate pace’ however the board did point out the fact Australia’s major Asian trading hubs are softening.
  • Inflation – (this was key in my opinion) downgraded its outlook which is ‘a little lower than forecast’ and ‘that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand’.
  • Domestic growth – ‘firmed a little over recent months’ with business conditions and labour markets conditions improving.
  • Financial environment – acknowledged that the increase in lending from the retail banks would ‘reduce support slightly’ but then eluded to the fact conditions overall were ‘quite accommodative’.
  • House prices – the RBA was happy to see a moderation of house prices in Melbourne and Sydney, showing the board has faith in the macro-prudential rules now in place and that they are containing the housing market risk.

The full picture:

I see more than just the points from the statement as factors for the RBA. Clearly the board wants the full picture to play out before acting and in the next eight weeks there are several global events that need to be understood before it might act.

  • The Fed – will they or won’t they initiate lift off? Fed fund futures pricing in a 51% chance.
  • The European Central Bank (ECB) – will it increase its bond buying program, will it just increase the timeline of the program or will it do both of these? The suggestion is that it will do both. Will it also cut rates putting the deposit rate further into negative territory and the lending rate at effectively 0%?
  • China’s growth rate – will it continue to slide or will we see it finally moderating? Will the People’s Bank of China cut rates for the seventh time in 12 months by year end or has it finished with its easing program?
  • The Bank of Japan – expectations are still for the central bank to increase its stimulus program this year, however now that belief is wavering, has it run out of ammo?
  • The commodities complex – will the downward spiral in most major industrial metals come to an end and finally bounce back? It doesn’t look promising.

These factors will impact the thinking of the board, as they will affect the AUD, the ASX and the broader Australian economy. The impact this has on confidence, employment and future spending expectations will feed back into the board’s actions.

2015 rate moves maybe over, but come February when all these factors are known, the RBA will come back to the table. The question is whether it too has the scope to act.

Ahead of the open we are calling the ASX up 47 to 5212.

This information has been prepared by IG, a trading name of IG Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication.  Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. 

CFDs are a leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.