Trade Desk Thoughts - RBA Cash Rate

RBA Cash Rate Actual 6.00%, Expected 6.50%, Previous 7.00%

Release Explanation: This is the interbank overnight lending rate. It sets the tone for mortgages, commercial loans, and all economic lending criteria. An increase in Interest Rate will have the effect of slowing economic growth. A decrease in Interest Rate is used by a Central Bank to stimulate economic growth. Economic strength can create Inflation, raising Interest Rates is one of the easiest ways to contain Inflation. This is the single most important reason why Currencies are bought and sold. A strong Interest Rate and robust business cycle will attract foreign investment. A weak Interest Rate will normally lead to a weak Currency as investors swap the higher yielding Currency for a profit.

Trade Desk Thoughts: The Reserve Bank of Australia continues the cutting cycle as the economic expansion cools and the business cycle peaks. The central bank cut for a second time this year, after the bank cut at the beginning of September, 25 basis points to 7%. Despite the analyst expectations of a 50 basis points cut, the Reserve Bank Board meeting had decided to cut a massive 100 basis points. According to the bank's analysis, the falling demand will be enough to slow down the rate of inflation, currently running at 4.5%. Most analysts expect the bank to cut further this year in order to offset the effects of the global slowdown on the local economy.

In the bank's statement following the interest rate decision, Mr. Glenn Stevens affirmed:

'Conditions in international financial markets took a significant turn for the worse in September. Large-scale financial failures in several major countries were accompanied by serious dislocation in interbank markets and heightened instability in other markets, including sharp falls in share prices. Official actions in a number of countries have been aimed at restoring stability, by adding to short-term liquidity and laying a foundation for longer-term recovery in the health of balance sheets. Nonetheless, financing is likely to be difficult around the world for some time ahead. This is also affecting Australia, albeit by less than in many other countries, given the relative strength of the local banking system.

Economic activity in the major countries is also weakening, and evidence is accumulating of a significant moderation in growth in Australia's trading partners in Asia. The expansionary effects of the recent surge in Australia's terms of trade are still coming through, but some decline in the terms of trade now looks likely over the coming year, with many commodity prices having declined from their peaks. This, combined with the likelihood of below-trend growth in the global economy, suggests that global inflation will moderate in 2009.'

Forex Technical Reaction: Prior to the release, the aussie had fallen, reaching a two and a half year low. Since the release hit the wires, the pair has fallen another 120 pips.

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