Reserve Bank of Australia: More Moves Expected

The Reserve Bank of Australia is widely expected to hike rates early Tuesday, which would be the second move in the cycle. A Bloomberg survey found 18 of 22 expect a 25 basis point 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 Asia in general and China in particular are important, as well, as 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 September retail sales and building approvals Tuesday. Both should advance. On the other hand, the trade balance on Wednesday should show serious deterioration from the A$1.524 billion deficit in August. The consensus is for an A$2.15 billion deficit.

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

The Australian dollar fell to its lowest level since early October on Monday (~$0.8906) bringing the decline since the October 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.

Disclosure: No positions