Central Bank Watch: RBA takes a step to the dovish side
The RBA’s July meeting statement offered very little new information. That said, the new information provided all seemed to be on the dovish side.
Strategy: Australian banks – Safe as houses
In the past few weeks, news flow on the Australian housing market has driven a widening in bank spreads. For us, the key risk factor for the Australian banks is a broad-based decline in the economy, driven by lower commodity prices. However, given increased scrutiny of their mortgage exposures and relatively weak bond technicals, we would not recommend going long Australian banks at current levels.
Global synthesis: The inflationary bias remains
This week, the Bank for International Settlements (BIS) highlighted a collective action problem among central banks. The BIS argued that monetary authorities were collectively underestimating global inflationary pressures and that a tighter global monetary stance was needed to keep inflation under control. However, in our view, this attempt to achieve greater coordination of global monetary policy is likely to prove ineffective and the inflationary bias in the global monetary system is likely to persist.
Commodities: Mining capex cost inflation is escalating
Capital and operating costs in the resources sector, and in particular in the metals and mining industry, are rising fast. This brings back memories of the double-digit cost increases that characterised 2006-08.
China: The much-anticipated interest rate hike to end the tightening cycle, or not
The PBoC announced the third hike in benchmark interest rates in 2011 late on 6 July. This is the fifth rate hike in the current tightening cycle that began in October 2010. This time, the structure of the hike is symmetrical – a 25bp increase in the lending and deposit rates – and across all tenors, except for demand deposit rate, which was left unchanged.
FX: Into the great known unknown
One of the largest “known unknowns” in FX is the extent China’s economy will slow in the coming months. We look for a soft economic landing, which implies further modest Asian currency appreciation versus the USD. A soft landing for China would also keep the USD on the back foot versus most of the G10 except highly sensitive cyclical currencies such as the AUD and NZD, which could weaken in response to slower global growth.
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ECONOMICS RESEARCH | INSTANT INSIGHTS
Foreign Exchange Research