RBA Kicks Off Central Bank Meetings

The Reserve Bank of Australia is widely expected to hike rates early Tuesday. This would be the second move in the cycle. A Bloomberg survey found 18 of 22 expect a 25 bp hike while the remaining four expect a 50 bp move. We are inclined to be part of the majority here, believing that fragility of the global recovery and strength of the Australian dollar favor an incremental approach. The swaps market looks for another 200 bp of tightening over the next 12-months.

The RBA will also unveil new growth and unemployment forecasts. The former is likely to be revised higher and the latter is likely to be revised lower. Inflation pressures are building and in its statement the RBA may address it, even if to note that the currency strength will help temper it. In Q3 the weighted median core CPI rose 3.8% year-over-year, while the RBA tolerance range is 2-3%.

Australia's links with China in particular and Asia in general is important. Emerging Asia expanded at a 10% annual clip in Q3 and the demand for Australia's iron ore, wool and coal remains strong. Australia exports about 20% of GDP.

In addition to the RBA meeting this week, Australia reports Sept retail sales and building approvals Tuesday. Both should advance. On the other hand, the trade balance on Wed should show serious deterioration from the A$1.524 bln deficit in August. The consensus is for a A$2.15 bln deficit.

The statement following the RBA meeting is likely to steal much of the thunder from Thurs quarterly monetary policy statement.

The Australian dollar fell to its lowest level since early Oct today (~$0.8906) bringing the decline since Oct 21 high of $0.9329 to 4.6%. The Australian dollar has rallied strongly off the low and a move back above $0.9070-80 would strengthen conviction that the correction is over. The pullback in spot was not sufficient to wash out the noncommercial position at the IMM as of last Tuesday. The net long position was trimmed back by a meager 1000 contracts to stand just below 53k.