Australia Rate Decision Today

The big headline of the night was the tensions in Saudi Arabia as the Crown Prince has ordered the arrest of several wealthy and high-ranking men, one of whom has died in a firefight that broke out during his arrest. While is it difficult for anyone to really know what is going on in Saudi Arabia, the tension has helped oil prices spike to new multi-year highs. WTI oil rose to $57.32 per barrel which represents a gain of 35% since the lows of late June. This helped the S&P500 energy index post a 2.2% gain overnight despite an almost unchanged close for the S&P 500 as a whole.  

Gold prices jumped 1.2%, possibly on the news of tensions in Saudi Arabia but otherwise there was no obvious catalyst. Gold prices have been in a downtrend since early September but it’s too early to tell whether last night’s jump represents a change in trend.  

Today the Reserve Bank makes its rate decision for the month although, for the 15th month in a row, no change is expected. Economists currently expect rates to start rising at the earliest in the second half of 2018. The statement is likely to comment that the bank expects GDP growth to average 3% over the next few years but is also likely to reiterate that it is concerned about the high debt levels of households.

The Aussie dollar rallied against the USD overnight but remains weak relative to the levels from August and September. The expectation of another rate hike in the US together with the outlook for Australian rates has kept pressure on the AUD. These expectations are reflected in a reducing bond yield premium for Australian bonds relative to US bonds. With the 10-year bond yields at 2.32% and 2.75% for the US and Australia respectively, the current premium of 0.43% for Australian bonds is near the lowest levels of the last seven years. The elimination of this carry-trade would likely make Australian bonds less attractive for overseas investors looking for high yields.   

Data Releases:

–    Australia Rate Decision 2:30pm AEDT

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This article was written by William O’Loughlin – Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via william.oloughlin@rivkin.com.au or by phoning +612 8302 3633.