• Sluggish local economic data.
• Risk appetite returns despite tentative sovereign debt yields.
• Rate decision spurs Aussie Dollar.

The RBA Board has looked past some poor economic data last week and focused on the Australian Terms of Trade instead. Mid last week we saw a continued fall in Building Permits to -3.3% for February and a weak Retail Sales Figure of -1.4%. The retail sales figure suggests that previous interest rate hikes have taken its toll on consumer sentiment. With low unemployment and reduced spare capacity, there’s upward pressure on housing prices which Governor Stevens recently noted as “getting quite high”. There was also a worse than expected AiG Performance of Mfg Index (50.2) which reduced speculation of a rate hike.

Risk appetite has supported the local currency with the S&P 500 up 1.7% from Thursday last week on the back of dovish comments from the Fed on interest rates. Greater risk appetite flew in the face of concerns about Greek Debt concerns that yields will be pushed increasingly higher to justify new bond issues. This came after less than half of the 12-year bonds made available last week were purchased, Greece needs to issue EUR32 billion in debt this year.

Of greater appeal for the RBA however was the wider Trade Deficit (-1.92B) and higher Commodity Price Index (1.4%). The data reflects the amount of equipment being purchased to fund the resource sector led capital expenditure and reaffirms the RBA’s position on the local currency that there will be continued above trend growth. With Inflation currently within the target band and interest rates below the long-term average, Governor Stevens and Co. not only raised rates but signalled continued pressure to more rates “closer to average”. According to a recent statement by central bank assistant governor Philip Lowe, mortgage rates are 25basis points lower than the long-term average.

At the moment, Australian Dollar growth is on Australia’s terms.

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