Rate-Cut Bets Pared Most in World as Jobs Rise
Comment of the Day

February 17 2012

Commentary by Eoin Treacy

Rate-Cut Bets Pared Most in World as Jobs Rise

This article by Kristine Aquino for Bloomberg may be of interest to subscribers. Here is a section:
Eighty-six percent of the new jobs last month were created in Queensland and Western Australia, two states benefiting from a resources bonanza as China and India increase demand for minerals and energy.

RBA Governor Glenn Stevens defied the forecasts of 24 of 27 economists and kept interest rates unchanged Feb. 7 after quarter percentage-point cuts on Nov. 1 and Dec. 6.

“Financial market sentiment, though remaining skittish, has generally improved since early December,” Stevens said after the decision last week.

Australian consumer confidence advanced 4.2 percent this month to the highest level since November, according to a Westpac Banking Corp. and Melbourne Institute survey of 1,200 consumers published Feb. 15. The outlook among businesses climbed to an eight-month high in January, a poll by National Australia Bank Ltd. of more than 400 companies showed Feb. 14.

Traders are forecasting a 32 percent chance the central bank will cut its benchmark to 4 percent at the next meeting on March 6, according to a separate Credit Suisse index. That's down from a 66 percent chance at the end of last week.

Eoin Treacy's view Most countries, with a similar population, would be thrilled with job growth of 46,300 in January, but for Australia it highlights the imbalance between the booming resources sector and the challenges faced by those dependent on the domestic economy. The RBA faces a fine balancing act as it attempts to cater to the needs of both these demographics. By holding short-term interest rates at 4.25% rather than continuing to cut it is presumably attempting to balance the competing pressures evident in the economy.

The Australian 10-year future broke downwards from the psychological 96 area last week and held the decline this week. A sustained move above that area will be required to check current scope for additional downside. 10-year yields broke out of the short-term base last week and appear to be unwinding the oversold condition relative to the 200-day MA. A sustained move above 4.3% would suggest a return to medium-term supply dominance.

The Australian Dollar 10-year Swap Spread reflects the increased premium paid by corporates to borrow over the sovereign. It has been trending steadily higher since 2010 and found support in the region of the 200-day MA this week. A sustained move below 70 basis points would be required to check potential for additional upside and suggest an easing of stress on the banking system

While the RBA might have stopped cutting short-term interest rates, at least for the moment, just about every other central bank is loosening policy. At 4.25%, Australian Dollar offers an attractive proposition for foreign investors. It continues to pause above the $1.05 area and a sustained move below it would be required to question continued potential for higher to lateral ranging.

Following a sharp decline, the S&P/ASX200 has held a progression of higher reaction lows since August. It appears to be in the process of pulling back to test that sequence and will need to find support above or in the region of 4050 if the medium-term upside is to be given the benefit of the doubt. The S&P/ASX Financials Index has a similar pattern.

The S&P/ASX300 Resources Index has been ranging mostly below 5000 since September and encountered resistance at that level again last week. A sustained move above 5000 will be required to begin to suggest a return to medium-term demand dominance.

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