ALBERT HERTER

‘AUSTRALIA’S SURPRISE RATE HIKE. MARKET REACTIONS,’ in the Wall St. Journal. IS THIS A ‘GAME CHANGER’?

In Uncategorized on October 6, 2009 at 16:15

The dollar is feeling pressure and commodities are rising in response to the Reserve Bank of Australia’s (RBA) surprise rate hike early Tuesday. Here’s the top of The Journal’s story: Australia on Tuesday became the first G-20 country to raise interest rates since the start of the financial crisis, breaking the ice for other relatively healthy economies to follow suit. The surprise move — which came earlier than markets expected — is a signal that the great global monetary loosening is beginning to reverse.

Australia’s rate increase “is a game changer,” says Sanjay Mathur, economist at RBS in Singapore. “No central bank wanted to be seen as the ugly duckling and be the first. Now that they’ve done it, theoretically it paves the way for tightening by other central banks.” For stateside short-term traders, the Aussie central bank’s move seems to set the stage for a bit of a bounce in markets ahead of the arrival of third-quarter earnings season.

But what about the broader implications of the surprise increase? Does it increase the prospect of tightening from the Fed anytime soon? Here’s a smattering of opinions we’ve seen from market watchers so far this morning.

Brown Brothers Harriman: The RBA hike and Gov Swan’s hawkish statement also reminds the market the US is lagging behind Australia and the Norges Bank where both are expected to hike in Q409. The RBA move reinforces the reason for US dollar weakness; that interest rate differentials continue to favor selling the U.S. dollar against the foreign currencies.

Miller Tabak: The move to hike rates 25 bps to 3.25% by the RBA was a surprise and in clear contrast to the Fed, whose Dudley repeated that rates will stay very low for a while. The Fed’s emergency cuts took the FF from 2% in Oct ’08 to .25% in Dec when the fear of collapse was rampant. The world is far from that scary time but the Fed wants to keep the peddle to the meddle and it’s why the US$ is near record lows and gold near record highs.

Scotia Capital: “One should not entirely jump the gun on the expectation that all major central banks will be following the RBA in short order as Australia presents something of a special case having avoided a technical recession with only one quarter of negative growth, due in no small part to its China gearing (a fact pointed to repeatedly by Australian policymakers). Not many other major central banks, or economies, can claim such a supportive state of affairs, and countries like the UK and US are not likely to be rapid movers on monetary policy either as they have also suffered the worst from banking sector crises which adds another unpleasant dimension to their economic recovery.

Ticonderoga Securities: “The markets’ read of the Australian Central Banks action is that the interest rate hike is further evidence that the global economic recovery is gaining momentum. Australia is a key supplier of a wide variety of commodities to China and its trading partners … The question that’ll be likely on everybody’s mind by mid-morning stateside is, “which bank will be the next to hike?” The question after that will likely be “is it too early or is it too late to raise rates?”

Copyright © 2009 Dow Jones & Company, Inc. All Rights Reserved

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