Reserve Bank assistant governor Guy Debelle has reiterated that the RBA has scope to cut rates further to offset the effects of a stronger Australian dollar.
What does it all mean?
The Reserve Bank has again highlighted that it has scope to cut rates, but at the same time has suggested it is not keen to follow through on the policy leaning. The Aussie dollar took this all in its stride, holding near US102.7 cents, and little different from either the US close or the Australian close of the previous day.
Investors hate uncertainty, so the inconclusive Italian election result has certainly unnerved investors across the globe. While the centre left is seen winning the lower house, no party is likely to win a majority in the Senate. So fresh elections are on the cards, but not until after March 10 when parliament is convened and the centre left is given first opportunity to form government.
Not only is the Italian election result pressing on investors’ minds, but they also have content with the fact that US Federal Reserve chairman, Ben Bernanke, will deliver testimony tonight. And the US sequester (forced spending cuts) applies from March 1 unless politicians can reach agreement on the Budget. In short, volatility may linger a little longer.
What are the implications for interest rates and investors?
The Aussie dollar has held relatively stable despite the uncertainty over the Italian election, US budget and US central bank policy settings. The euro slumped against the greenback overnight and the Japanese yen soared, but the Aussie is gradually drifting lower in the trading range of US102-105 cents that has prevailed over the past month.
CommSec expects no change in interest rates for a number of months. The Aussie dollar is expected to hold in a range of US98-110 cents over 2013.
The lift in the Aussie sharemarket late in 2012 and early in 2013 owes much to the reduced volatility, prompting investors to switch from cash to equities. If volatility returns, investors may return to the sidelines – with implications for ASX and Computershare in terms of reduced trading volumes. But there does appear a more rational response to market news than a year ago, as shown by the sharp recovery in the domestic sharemarket today.
