Originally published by Chamber of Merchants
This is a brief post on what I regard as a foolish trade based on the expectation on the RBA raising interest rates.
The AUD exchange rate with USD has strengthened on the higher than expected inflation numbers for Australia this morning. This is because logic dictates that higher inflation requires higher interest rates, so traders are buying into the AUD for the next “interest rate rise”.
Merchant’s Insight
- The unemployment numbers for Australia just recently were about 100% in the wrong direction: down.
- GDP is slowing.
- A housing bubble may pop on rising interest rates and debt defaults.
- The inflation reported is bad inflation , from the recovering oil price. It acts as a tax on you and me when we pay more for our fuel and more for the products that we buy. Have your wages increased lately? If not, then your standard of living is about to go down.
To bet that the RBA will raise interest rates is a fool’s bet in my opinion.
If the RBA raises interest rates in Australia it will make borrowing more expensive, slow down the economy further and probably lead us into a fearsome recession.
Conclusion
In my opinion, betting on an interest rate rise is a very narrow view on what is happening in the world right now.
Just like the USA, we are staring into the face of stagflation: cost of living increasing while productivity, growth and wages are decreasing.
When traders realise their myopic mistake, it will already be too late: that Australia cannot afford an interest rate hike.
Inflation or no inflation: We’re in the wake of a low growth, increasing cost economy and the RBA is going to have its hands full trying to steer the economy out of danger. If Crude Oil, for some reason, starts trading above $60, then inflation is going to start becoming a serious problem.
In my opinion, there is a higher probability of the RBA cutting rates than raising rates. The AUD currency is becoming too strong and our exports are going to suffer as a result, which will eventually be revealed in a lower GDP.
One of the quickest fixes (albeit flawed) ways of fixing this is to drop interest rates, not raise them.
Good luck, Philip. You’re going to need it, for all our sakes.