RBA cuts overnight rate to record low of 2.25%

Tuesday, February 03, 2015

The Reserve Bank of Australia cut its key rate to a record low of 2.25% as central bankers cited an overvalued Australian dollar, joining a growing list of global central banks that have eased policy this year in the face of falling commodity prices. The overnight rate was cut from 2.55 to 2.25% with the RBA outlining that the long term growth target would be weaker and the joblessness would spike higher than previous estimates. The AUD traded towards a fresh five and a half year low against the US dollar, losing as much as 1.95% overnight as selling pressure remained firm throughout the trading session, pushing the currency towards 0.7651 against the USD at one point. Central banks around the world have adjusted their approach to monetary policy in recent months, opting for looser controls in response to large scale stimulus programmes from the ECB, BOJ and PBOC as they attempt to combat sluggish growth. Given the sensitivity of the Aussie dollar to any tempering in Chinese growth, many market participants expect further devaluation as currently the currency is trading above most estimates of fundamental value.

German 10 year yields opened below their Japanese equivalent for the first time ever as concerns regarding the outlook for the eurozone seem to have resurfaced and investors worry that the single currency union is heading down the path to a lost decade, similar to Japan’s path throughout the 90’s. 10-year German government bond yields were relatively unchanged, dropping a basis point towards 0.307% early on this morning; however, the divergent path was largely attributed to a sharp jump in Japanese 10 year yields, which rallied towards 0.371% from 0.291% on the open. With the eurozone refinancing rate already in negative territory, investors are hoping the stimulus announced by the ECB last month will help lift the region out of the doldrums. 

Greece has dropped its push to urge euro area members to write down its debt, instead putting forth the proposition to exchange existing borrowing for new bonds linked to economic growth. As expected, the newly elected government faced considerable EU opposition for the debt forgiveness plan that had proven a popular policy among voters. However, finance minister Yanis Varoufakis outlined a plan to swap some Greek debt owned by the ECB and EFSF for new issues which would allow Greece to avoid imposing an out and out haircut on creditors. The move could be seen as an attempt by Prime Minister Alexis Tsipras to stabilise the Greek stock market after the ASE general index lost almost 15% last week on speculation that the quickly developing stalemate could see Greece leave the euro.

RBA cuts overnight benchmark rate to 2.25%, sends AUD lower

AUD Curncy Australian Dollar Sp 2015 02 03 07 26 20

ASE general index recovers some of January's losses

ASE Index Athens Stock Exchange 2015 02 03 08 05 50

Events for today

0930

UK

Jan

Markit/CIPS construction PMI

1000

EZ

Dec

PPI

1500

US

Dec

Factory Orders

1500

US

Feb

IBD Sentiment

All times UK Local Time

 

Topics: ECB, EUR, AUD, Yields
More from: Kash Kamal