Tuesday, 3 April 2012

Yet More Economic News to Jolt the RBA

Two more bits of economic news today – two more reasons to look at the recent RBA action with incredulity.

The Performance of Services Index registered a reading of 47.0 points in March, up a tiny 0.3 points from February.  A reading below 50 means the sector is contracting and for 5 straight months now, this index has been below 50.

The international trade data showed a second straight deficit on the balance of goods and services as exports crashed and imports levels were only slightly down.

Since August 2011, the value of exports has fallen a whopping 13% and the trade balance has gone from surpluses of around $2 billion, to deficits of around $0.5 billion.  Some of this is due to a weak world economy (memo RBA – this is one of the mechanisms by which Australia is being impacted from the Eurozone recession and the deceleration in growth in China) and some from the strong and over-valued Australian dollar.

Now there is not much policy makers can do about the world economy – it’s a given.  And there is only a partial influence on the AUD from policy makers in the world of a freely floating exchange rate, but one mechanism that drives the Aussie dollar is interest rates.  And as we all know now, Australia’s interest rates have been locked in by the RBA at a rate miles above those in most other countries.

This is honey to the high yield investor bees.

It’s one reason why around a staggering, mind numbing, 80% of the government bond market is held by foreigners – the yield is so very high.  When these foreigners bought the $160 billion or so of bonds, they bought the AUD driving it higher.

A lot is still to be written and discussed about the RBA actions since the start of 2012, but with each installment of news, the words are getting less kind.

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