Experts predict market will rebound

The “panic attack” that gripped investors over the last couple of days will pass and financial markets will rebound, according to investment experts. Professional Planner reports that while the timing of a rebound is uncertain, investment research firms said the fundamentals of the Australian market are strong. Fund managers also said the Australian market is currently valued at about 10 to 11 times earnings, with a 5 per cent dividend yield. However, Australian stocks have historically traded at between 14 and 15 times earnings, and market returns, from dividends and earnings growth, may be as much as 15 per cent in the coming year.

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AUD Outlook: RBA decides to hold interest rates steady despite inflation risks

 

Statement by Glenn Stevens, Governor: Monetary Policy Decision

At its meeting today, the Board decided to leave the cash rate unchanged at 4.75 per cent.

The global economy is continuing its expansion, but the pace of growth slowed in the June quarter. The supply-chain disruptions from the Japanese earthquake and the dampening effects of high commodity prices on income and spending in major countries both contributed to the slowing. It is still not clear how persistent this slower growth will be. The supply-chain disruptions are now gradually abating and commodity prices have softened of late, though they generally remain high. In China most indications suggest only a mild slowdown so far.

The central scenario for the world economy over the next couple of years envisaged by most forecasters remains one of growth below the pace of 2010, but at or above long-term averages. Downside risks have increased, however, as concerns have grown over the outlook for the public finances of both Europe and the United States.

Australia's terms of trade are now at very high levels and national income has been growing strongly. Investment in the resources sector is picking up very strongly and some related service sectors are enjoying better than average conditions. But in other sectors, cautious behaviour by households and the high level of the exchange rate are having a noticeable dampening effect. The impetus from earlier Australian Government spending programs is now also abating, as had been intended.

The resumption of coal production continues, but a full recovery of flood-affected production now looks unlikely before early next year. Precautionary behaviour by households also looks likely to keep some areas of demand weaker in the near term than earlier expected. Overall, growth in real GDP through 2011 is now likely to be at about trend. Over the medium term, overall growth is still likely to be at trend or higher, unless the world economy deteriorates noticeably.

Growth in employment has moderated and the unemployment rate has been little changed, near 5 per cent, for some time now. Reports of skills shortages remain confined, at this point, to the resources and related sectors. After the significant decline in 2009, growth in wages has returned to rates seen prior to the downturn, though productivity growth remains weak.

Year-ended CPI inflation has been high, affected by the extreme weather events earlier in the year. As these effects reverse over the next couple of quarters, CPI inflation should decline. But measures that give a better indication of the trend in inflation have begun to rise over the past six months, after declining for the previous two years. While they have, to date, remained consistent with the 2–3 per cent target on a year-ended basis, the Board remains concerned about the medium-term outlook for inflation.

It is appropriate under such circumstances for monetary policy to exert a degree of restraint. Most financial indicators suggest that it has been doing so, as a result of the Board's decisions last year. Credit growth has declined over recent months and is very subdued by historical standards, even with evidence of greater willingness to lend. Most asset prices, including housing prices, have also softened over recent months. The exchange rate is high. Each of these variables is affected by other factors as well, but together they point to financial conditions being tighter than normal.

At today's meeting, the Board considered whether the recent information warranted further policy tightening. On balance, the Board judged that it was prudent to maintain the current setting of monetary policy, particularly in view of the acute sense of uncertainty in global financial markets over recent weeks. In future meetings, the Board will continue to assess carefully the evolving outlook for growth and inflation.

Source: http://www.rba.gov.au/media-releases/2011/mr-11-16.html

AUD Outlook: The Rise of Australian Dollar

IF THE rise of China and the demise of the US dollar continue apace, the Australian dollar will run to dangerous new heights. The Aussie dollar was floated in 1982. In its youth, "the Aussie", as it is known on foreign exchange markets, was a "dollar-bloc" currency, mostly moving in tandem with the greenback and the Canadian dollar.

By 2003, however, and now in its 20s, the $A became more aligned with the fortunes of China. It became known in recent years as a "risk trade" - that is, a currency that waxes in the good times then wanes when things get rocky on the global economic front.

But things have changed lately. The $A has finally left home. Although risk on global markets has risen, the $A has hardly been marked down like it used to be at the first whiff of volatility.

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Now in its adulthood, the currency, although still a fully fledged proxy for Asian growth, has taken on something of a safe-haven complexion.

As the spectre of a US debt default has rattled bond and sharemarkets worldwide, the $A has actually risen. Whether this is a momentary or a lasting phenomenon, only time will tell.

But the implications for Australia of a permanently high currency - and this assumes that China will not blow up for some time, which is a decent-sized "if" - are profound. We are talking the destruction of entire industries under the weight of prohibitive export prices. That subject is for another day. Meanwhile, just to respond to claims of mischief: an online article by yours truly yesterday said the $A was headed to $US1.50 should the relentless rise of China and its insatiable demand for our commodities persist.

This was only a forecast with a caveat inextricably attached - that is China.

It would seem obvious that if the terms of trade keep rising in this country's favour, and the unprecedented boom proceeds on the present trajectory, then the $A will keep rising. A rate of $US1.50 then is plausible; indeed just as plausible, over time, as the $A plunging back to US60¢ should boom quickly turn to bust.

For foreign investors, there is nowhere to turn. The $US is getting a thrashing as investors lose confidence in America. Lately, there might have been a flight of capital into the euro, yet Europe is in disarray itself as Greece heads for inevitable default and other euro members teeter. The yen has risen, though Japan's post-growth economy makes it a less than appetising destination for capital.

There is the Swiss franc, which has shot the lights out as a "safe haven". But this small European tax refuge has a case of capital-overload. So, the Aussie, rather than being sold off in the turmoil of recent weeks, has pushed to new highs. Reserve Bank Governor Glenn Stevens noted recently that other central banks had been buying the $A. It's a proxy for commodities, Australia's debt-to-GDP ratio is low, and our interest rates are high. And privately, Stevens, despite the pain for exporters, is happy to have the $A high.

It keeps a lid on growth, and inflation, and saves him having to hoist interest rates any further and hurt the mortgage belt.

Now, more than ever a proxy for China, the $A has broken links with its dollar-bloc mentor, the greenback.

But it is also proving resilient like never before - and this is the essential change in its character - even as instability has taken a grip on the world economic stage.

As much as anything, the strong currency is down to high interest rates. Whereas rates in the US, Japan and Europe remain depressed, the base rate here at 4.75 per cent is the highest in the developed world. This interest rate differential attracts foreign investors. They chase the high rates in fixed interest markets, the rising $A.

As long as commodities keep rising, inflationary pressures will continue and rates here will stay higher than the rest of the world.

Then there's the most recent trade numbers, for the June quarter. The "terms of trade" rose 5.3 per cent to the highest since records began in the 1870s. We cannot underestimate the potency of this metric. The terms of trade is the measure of export to import prices; how well Australia does versus the rest of the world on the basis of relative prices.

It was the pastoral business and agriculture, wool and wheat, that delivered this nation's wealth last century. It brought us our standard of living. Now, it's coal and iron ore, gold and base metals.

The Reserve Bank estimates that for every year the terms of trade stays at these levels, it is worth some 12 per cent to 15 per cent of Australia's $1.3 trillion annual economic output - up to $200 billion.

And so it is that, as long as China keeps on and commodity prices keep pushing higher, the $A too will keep rising. In the US, as they keep printing money the value of the greenback declines. And they like it this way, as it devalues the size of their debt.

With the US economy, and its currency, in terminal decline, the Aussie will continue to appreciate, but only as long as China holds. And that, once again, is a sizeable "if".

Source: http://www.smh.com.au/business/little-battler-makes-its-way-in-the-big-world-20110727-1i08j.html