The Governor of the RBA will tonight speak providing his latest thoughts for the Australian economy. In my opinion the speech is likely to be focused around the current uncertainty across the globe, especially with China, Australia’s main trading partner.
There looks as though there might be some trouble brewing in China with regards to the huge debt levels. Whilst there is unlikely to be an imminent problem I expect Lowe will comment.
Inflation is key
There could be hopes for an interest rate hike in Australia towards the end of this year with the RBA closely monitoring the situation. Australian inflation is at a near 20 year low however the general trend moving forward is that things could start to get better.
Carry trading unravelling
The AUD has been incredibly strong over the last 6 months, however that could be likely to change. There has been a large amount of carry trading taking place where investors borrow money in a low interest currency and then invest it in a higher interest rate currency. For example, borrowing GBP with 0.25% interest and investing in the 1.5% AUD. There is a large amount of risk with this, but moving forwards that could be reduced. The USD is considered a stable currency as so many people trade it, it’s rare one factor can influence it. If there was to be interest rate hikes in the US, then that might encourage traders to release their AUD positions.
In turn this would weaken the AUD and potentially increase inflation levels in Australia. Whilst a slightly speculative series of events, the talk coming from Federal Reserve members certainly raises the belief that interest rate hikes in America are on the cards.