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Royal Bank of Australia Expected to Cut Rates, Could Comment on China

Royal Bank of Australia Expected to Cut Rates, Could Comment on China
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The Royal Bank of Australia is set to release its latest interest rate decision late Monday night. At the October meeting, the Bank unexpectedly cut the benchmark cash rate to 3.25 percent from 3.5 percent. Economists are split over the rate decision, with a majority calling for a further cut of an additional 25 basis points while several economists see no rate cut.

Economists surveyed by Bloomberg are fairly confident that a rate cut is coming. 20 of 27 economists surveyed, including number one rated economists Bill Evans at Westpac Banking Group, see a 25 basis point cut to 3.00 percent from 3.25 percent. An additional cut would mark the second consecutive cut in the cash rate, a sharp change of policy tone from earlier this year when the RBA was looking to hike rates. 7 of the economists are expecting the rate to stay the same and none are calling for a rate hike.

The currency to watch overnight is the EUR/AUD cross, as this pair tracks very well both European stresses and Australian rates. Over the summer, as the Swiss National Bank was diversifying out of euros and into Aussie dollars (due to the accumulation of euros from the EUR/CHF peg) and the flare up of the European debt crisis sent the pair to record lows. However, the pair has rallied nicely since August and now sits at a key technical support at 1.2330.

A rate cut would surely be Aussie negative, the question being how negative. It appears as though a reflex jump higher to near 1.2415 on a rate cut is plausible, looking at the 1-year chart, however sometimes the initial moves do not necessarily make sense. Also, the rate decision is due out at 10:30 pm New York time; after the steep fall from 1.24089 to as low as 1.2329 from the Asian session through the American session, it would make sense that a bounce is due as well.

One key indicator to watch will be the Ban's comments on the Chinese economy. The Australian economy is largely dependent on exporting its vast raw material exports to China, so a continued slowdown in China would result in a slowdown in exports, hurting GDP. Also, the Aussie dollar is affected by this dynamic as Chinese companies have to be Aussie dollars to purchase the raw materials; thus, a slowdown in materials demand in China resulting from a slowdown in growth is Aussie negative.

Recent data out of China has been mixed: the manufacturing sector, the economy's largest, has shown new signs of life through the PMI data released last week. However, the smaller services sector appears to be slowing as evidenced by service PMI data. Also, storied short-seller Jim Chanos of Kynikos Associates Sunday warned on Chinese stocks, saying that, although the government continues to implement measures to prop up the economy, company performance has continued to suffer. Thus, any comments from the RBA on the state of the Chinese economy, the ongoing export boom in Australia, or the changeover in power in China should be taken to heart.

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