Sep RBA & the $100 Iron Ore trapdoor

Market expectations for tomorrow’s RBA meeting are very low – at close on Monday the OIS market had ~4.5bp of cuts priced in, and I would say that’s too much ‘insurance’ …

Looking further out, however, things are changing.

The biggest change is the sudden drop in export prices. In AUD prices, the RBA’s Index of Commodity prices fell by 4.3% in August, despite the 2.1% decline in the AUDUSD exchange rate.

Due to the fact that Australian export prices are much more volatile than import prices, any terms of trade forecast is basically an export price forecast — note the similarity between the RBA’s terms of trade chart (from the Q3 SOMP) and their commodity price index.

It’s fairly clear just from comparing these two charts that the terms of trade are falling more quickly than the RBA expected. That constitutes a real tightening of monetary conditions, and it is something that the RBA will want to respond to if it is sustained.

Look for the RBA to inch up their dovishness in the September statement, probably by noting the sharp decline in commodity prices (who knew the $100 Iron Ore floor was a trap-door?) …

It still seems most likely that the Bank will await the Q3 CPI data before easing further – but 50bps of easing in Q4 (most probably 25bps in each of Nov and Dec) is starting to look very likely.

The market has ~58bps priced to Dec — given the elevated risks offshore, I expect that the short end can and will price in more.

Advertisements
This entry was posted in AUD, RBA. Bookmark the permalink.

6 Responses to Sep RBA & the $100 Iron Ore trapdoor

  1. 3d1k says:

    Very interesting. FWIW prices have retreated more quickly than I would have wagered, given I see no respite until 2013 (ideally!). Concerns remain in terms of ‘perfect storm’ scenarios. But what the heck, it’s been goooood. Uncertainties prevail.

  2. ssec says:

    Are you still long AUD then?

please comment

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s