On the RBA, GDP and the Australian Dollar

I haven’t posted much this week as I have been busy so please don’t think I’ve been dodging my recession call in the wake of yesterday’s stellar GDP release. I’m about to hit the road so here are some quick thoughts.

On the current market bounce: The markets good too bearish, priced too much in and are having a natural reaction to the recent pessimism. Australian Dollar and Euro/USD spec futures positions were skewed so far to the shorts that they need more and more bad news to take them any lower. In the absence of this with everyone short or expecting lower prices we get the natural reaction.

How far can this go? Probably further yet – the Aussie Dollar is pulling up this morning right on the 38.2% retracement of the recent sell off but it has broken back inside the old downside channel so it could run into the mid 1.01 region.

Equities and bonds are likely to also feel the benefit of the unwinding of short-term pessimism.

On the Australian Q1 GDP: What a great number and i hope that all Australian’s pay attention to it because even though the aggregate number said as much about the problems of the patchwork economy as any single GDP release can this is a good number in aggregate and a focus on it might get some of this money that is being released from the RBA rate cuts into people pockets circulating through the economy.

So I’m always pleased to be wrong in this sense – but I still don’t think the process of structural adjustment in household debt has run its course and you could see this in the deflator that accompanies the GDP. So rates can still go lower even with this strong number.

On this topic I was disappointed to see pundits and economists bashing each other up about who’s right on the economy and who is wrong on the basis of one number. The Twitterverse was alive with retribution and rhetoric yesterday and these pundits need to remember that the economy is not some abstract game played on their iPhone where they are in battle with other players – its real and its made up of people. SOme are doing well, some are struggling but to abstract the people and make getting a single number right or a view correct at present the prize speaks volumes about why economics is a lost art. Nuf said.

On the RBA: This is going to be interesting and the flow of data now becomes even more important than it was in reinforcing the need for more cuts. That is always the case but with a number like yesterday’s GDP the hawks have taken flight. Personally I hope I am wrong and that a new period of strength is upon us – but with all the uncertainty both domestically and offshore I think it’s a little early for this just yet.

Have a great day

Greg McKenna


Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If however you do need advice on Investments, Economics, Funding and Liquidity, Interest Rates and Forex and Derivative markets we are happy to help.

Please Email the team at Lighthouse at info@lighthousesecurities.com.au or Greg directly on greg@lighthousesecurities.com.au

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