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Nov 02

The RBA goes up and so does the Yield Curve

Normally I try and produce the chart before the RBA’s decision but was a little slow this time but it is a little intersting to see the market’s reaction to the RBA’s decision to increase the cash rate to 4.75% and its shown in the chart above…an increase in yields across the all maturities although not too much for the 3 month T-Note.

Anyway, I can imagine Steve Kean will be smiling as one of the likely impacts of this rate rise will be further declines in residential property prices across Australia. Personally, I am currently waiting on my mortgage lender to get back to me with an indication of my borrowing capacity….I guess with this rate rise he might come back with a pretty low number…oh well, no hurry for me as I partilaly agree that property prices will go lower or at best sideways for a long time yet.

Not surprisingly, the Australian sharemarket dropped a little bit as soon as the RBA’s announcement was made (as valuations reduce with higher interest rate) but then increased around 15points to the end of the day…not much of a movement but I guess the RBA’s concerns are about higher inflation resulting from stronger private spending which should be a positive for the sharemarket. Employment is strong and likely to be looking stronger in the short term so this move makes sense if that’s the case.

Not surprisingly the rate rise has seen the Aussie dollar incerase sharply and is again flirting with USD parity. It immediately jumped 1cent after the announcement and has been sitting on 0.998USD since.

Whilst the RBA is concerned about local inflation, with this strong dollar I tend to think a lot of our dollars will be spent overseas and/or reducing our personal debt and irrespective of our spending patterns, with deflationary concerns continuing in the US, Japan, and Europe my gut feel is that this move may be a tad premature.

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