httpvh://www.youtube.com/watch?v=yrjj3dDvX2E
Governor Stevens turns the lights out, calls the police.
• RBA undermines inflationary pressures.
• UK inflation; King’s move.
• Japan in vogue; modelling the carry trade.
The RBA is the voice of Australian inflationary pressure and during 2009 & 2010 provided a strong undercurrent that pushed the Australian dollar higher. The RBA is always measured in its assessment, however this week Governor Stevens changed his tone when he announced that “we’re ahead of the game, which is where you want to be, and that’s the thing that affords you periods of sitting, waiting and watching.” Going forward, the growth in capacity constraints and domestic spending will not continue to be as acute as in previous quarters and the interbank cash rate (4.75%) is likely to remain at its current level for the first two quarters of 2011. This has taken the wind out of the sails of the AUD however China is still very much the panda in the room and the terms of trade will be key in providing direction for the Aussie dollar.
There has been a stalemate in recent times between BOE Governor, Mervyn King and financial markets. Headline inflation has failed to impress since the credit crisis began in 2008 and the central bank governor has previously talked down inflationary pressures to assist export markets through a weaker pound. Last night’s CPI figure (4%) is twice the central bank’s target figure and will likely force his move to raise interest rates, either in March or April.
Japan has become more appealing as the carry-trade country. Traders are increasingly borrowing at low rates in Japan in order to profit in more prominent growth stories such as Australia’s resources boom. Japan had cases of disinflation in the 1990’s where low interest rates didn’t stimulate growth and a recessionary risk was highlighted this week with a weak showing in GDP (-1.1%). With the US economy showing a slightly stronger pulse recently, Japan’s low interest rates (0.1%) are utilised as a safer option when investing in higher yielding currencies. The AUDJPY has rallied 3% in the previous three weeks.
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