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Changing of the Guard at the RBA: Getting to Know Dr. Phillip Lowe

Changing of the Guard at the RBA: Getting to Know Dr. Phillip Lowe

2016-10-14 23:00:00
James Stanley, Strategist
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Changing of the Guard at the RBA: Getting to Know Dr. Phillip Lowe

Fundamental Forecast for the Australian Dollar: Neutral

The most recent Reserve Bank of Australia rate decision at the beginning of October was the first to be led by newly-installed RBA Governor, Dr. Phillip Lowe; ending a run of ten years in which the bank was led by his predecessor, Mr. Glenn Stevens. Mr. Stevens presided over the bank during some considerable global tumult, and did so in an impressive manner as the Australian economy has now tallied 25 years without a recession - and during the majority of his tenure the world was feeling the strains and repercussions of the Global Financial Collapse. But more recently, he and the RBA have been unable to help the Australian economy move back towards their long-running inflation target of between 2-3%; and the debt load that’s been accumulated by Australians may portend a period of turbulence ahead.

But this isn’t unique for the present environment, is it? Much of the world is suffering from the same symptoms of low growth, slow inflation and fragile labor markets. Questions abound on the state of the global economic ‘recovery,’ and how to ‘fix’ it. As major markets in China and Japan continue to face heightened pressure, this raises the potential for even more risks for an Australian economy that trades heavily with each of those partners. As these concerns have grown even louder over the past year, even more concerns have been raised around the Australian economy’s ability to continue moving forward at historical average growth rates, unscathed by the setbacks that are commonplace with recessionary environments.

Going by money market rate expectations, this doesn’t appear to be an immediate concern at the present. A potential move in rates doesn’t look likely until at least May of 2017, and since this is Dr. Lowe’s first few months on the job at the head of the RBA, it would make sense to take on these initial near-term rate decisions with a great amount of caution; only posing a move in rates unless absolutely necessary. Also a factor is that the RBA has already cut rates twice in 2016, most recently in August; and the case can be made that the entirety of that cut has yet to transmit into current data. Next week brings a few additional data points that could allude to the current state of the Australian economy and how quickly future moves to rates might need to take place.

On Monday, we hear from Phillip Lowe as he speaks in Sydney, and later in the day we get meeting minutes from his first rate decision at the head of the bank. Tuesday brings the Westpac leading index, and Wednesday brings employment data along with business confidence numbers. Employment numbers will likely be the highlight of next week’s Australian data; but also of interest will be the larger overall macro themes of China and Japan. Net negatives for each of those economies can amount to a net-negative for Australia as well, so should developments transpire in Asia, this could certainly shape the tone of the RBA’s stance at future meetings. China, in particular, can be quite unpredictable, and another abysmal export print earlier this week brought up even more questions about the ability of the Chinese economy to turn the corner of the current slowdown without too much collateral impact to their trading partners.

The forecast for the Australian Dollar will remain as neutral for the week ahead. While the chart has been showing a top-side bias for now almost nine months, the longer-term price action (past 3.5 years) in Aussie has been discernably bearish. The upward sloping trend of the last nine months is really just the channel formation of a ‘bigger picture’ bear flag. There is a clear lack of a bullish macro driver in the immediate forefront of the Australian Dollar, and the probability of more risk aversion on the back of further developments in China or Japan could offset that near-term bullish technical bias.

Optimal for the Australian economy would be a quiet patch for the next couple of months so that markets can get more acquainted with Dr. Phillip Lowe in the effort of ‘getting a feel’ for how he may look to lead the bank in the months and years ahead. This would also allow those recent rate cuts to begin to show in Australian data so that markets can garner an opinion on how much any additional cut(s) might help, or even if they’ll be needed at all.

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