Australia | Jun 24 2009
By Chris Shaw
In recent weeks the market has been increasingly pricing in expectations the next interest rate move by the Reserve Bank of Australia (RBA) will be to lift rates rather than cut them further, but in the view of TD Securities this is entirely the wrong assumption.
Stephen Koukoulas, the group’s global strategist, takes the view the combination of the current recession, low inflation and expectations of higher unemployment in the months ahead means the RBA still has a significant amount of room to lower rates, perhaps as soon as in the next month or two.
With respect to growth, Koukoulas believes GDP growth will remain flat to weak and calls in as evidence the below trend growth over each of the last four quarters. This suggests both that further stimulus measures could be applied to the economy, while in his view it also indicates there is no threat to inflation until economic output begins to pick up.
Koukoulas also notes while officially inflation sits at around 2.5% at present, on the group’s numbers it is actually running at closer to 1.5% now and may fall below 1.0% in the next couple of years. Business investment is also likely to continue its downward trend for some time in his view, which will add to the economy’s excess capacity.
Adding all this up Koukoulas argues there remains plenty of scope for further rate cuts, so one trade idea for this is to go short the Australian dollar as if his theory on rates proves to be correct, Koukoulas estimates the currency could quickly fall by as much as 5.0% on the crosses rather than against the US dollar in particular.