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Expectations From the RBA

Written by A Forex View From Afar on Wednesday, November 19, 2008

In a speech held on Wednesday, the Reserve Bank of Australia Chairman, Mr. Glenn Stevens, confirmed to some extent, the market’s expectations that more rate cuts are coming in the following period.

The Australian economy is set to suffer a major slowdown next year, but some analysts say it will manage to avoid a recession, if the necessary steps are taken. The Australian central bank has already taken the steps towards monetary easing, by cutting a total of 200 basis points within the last three meetings. In his speech, Mr. Stevens announced support for the government expansionary policy, which usually implies increasing the government expenses.

Right now, the markets are expecting at least a 50 basis point rate cut at the next meeting, down to 4.75%. The market’s expectations have full chances of materializing, since the RBA adopts an inflation-targeting regime, in which anchoring future expectations is a crucial tool in implementing the monetary policy. A similar behavior (anchoring future expectations) can be seen at almost every major central bank.
Mr. Stevens has also declared “the cycle of greed and fear cannot be regulated away”, referring to the credit crunch and its origins.

Furthermore, the RBA Chairman said central bankers should focus more on asset swings and leverage, and trying to anticipate bubbles while they are forming. This is a remark that will probably model the financial system in the coming years, since many fingers point to the Fed for letting the housing market enter into a bubble and at the same time allowing the banking system to over-leverage itself. These two (bad) decisions were the main causes of the credit crunch.

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There is a constant question from some traders as to why anybody would ever need to consider the ‘F’ word when trading. Fundamentals: what is so damaging at looking at both Technical charts and having a Fundamental filter to gauge how many Lots to put on? Why is it that accepting that Technicals give us price points to trade, but Fundamentals determine the direction that we travel is so difficult for some traders to accept? Without a Fundamental Filter very few pure Technical traders would have seen this Dollar move coming today.

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