THE DISTILLERY: Rates seers

Jotters peer into the future on interest rates, while one explains the costs of RBA interference with the Australian dollar.

The Australian dollar remains overvalued, but the Reserve Bank is unlikely to cut interest rates at its meeting today. Of course it would take more than a 25 basis point cut to bring the currency down to something close to fair value and one commentator explains just how much fire power the central bank would need. Meanwhile, another business writer looks at the NSW government’s debt reduction efforts via asset sales.

But first The Australian Financial Review’s Christopher Joye explains just how costly it would be for the Reserve Bank to interfere in the currency markets to put downward pressure on the Australian dollar.

"Some estimates imply the quantifiable costs could be more than $11 billion a year. RBA governor Glenn Stevens hinted at this when he warned there were ‘not inconsiderable risks the taxpayer would effectively take on with extremely large-scale intervention’. Since the 1980s, the RBA has profitably leant into overshooting currency markets on several occasions. In most instances, the RBA was buying Aussie dollars to staunch price falls, and capitalising on an implicitly positive ‘carry trade’ as it retired higher-yielding domestic securities by selling lower-yielding foreign assets. The problem is today the RBA would arguably face an extremely negative carry trade.”

The Australian’s economics correspondent, Adam Creighton, keeps his eyes on the Reserve Bank’s next meeting, with a Westpac economic report indicating that the board will probably face a much more gloomy set of numbers.

"Westpac's ‘data pulse’, which tracks the fraction of economic data that has improved in the past eight weeks, has hovered around 41 per cent. But only 25 per cent of Australian data released in the past month have beat previous outcomes, and that ratio excludes yesterday's data showing falling company profits and retail sales.”

Creighton wisely doesn’t lead the reader into a discussion of whether an October rate cut is on the cards. It’s too early. However, it’s reasonable to conclude that the News Limited writer would be opposed to it.

Remember, just three months ago the Reserve Bank was being pilloried for slashing rates by 75 basis points between May and June. Creighton wrote at the time that rate cuts take a while to feed into the economy, while pointing at 50 basis points in cuts in November and December last year.

Meanwhile, The Australian Financial Review’s Chanticleer columnist, Tony Boyd, says the NSW government could raise up to $1.5 billion from the securitisation of up to half the state’s lottery revenues.

"Add the proceeds of the lotteries sale to the other NSW asset sales out in the market – Port Botany, Port Kembla and the electricity generators – and you are looking at a potential $10 billion boost to the state’s budget. That shows NSW Treasurer Mike Baird is doing everything he can to protect the state’s AAA credit rating whilst having his hands tied in relation to the state’s biggest asset, the $35 billion in electricity poles and wires, which are off limits until the next state election in 2½ year’s time because Premier Barry O’Farrell says he needs an explicit mandate to sell them.”

Perhaps further reinforcing the notion that a rate cut is not on today, Fairfax’s Michael Pascoe stresses that China’s PMI reading of less than 50 points still reflects industrial production growth of 8 to 9 per cent.

In equities, The Australian’s John Durie reports that the dour trading volumes have forced ANZ Bank to close its boutique equities arm, ANZ Equities. Further, the market is pleading for decisive action from European Central Bank president Mario Draghi, but Durie writes that hopes of this are fading.

In company news, Fairfax’s Adele Ferguson has got her hands on a list of the most shorted stocks on the ASX over the past few months. Unsurprisingly, the retail stocks loom large.

And finally, The Australian Financial Review’s Michael Smith reports that key executives at Alesco Corporation could see their long-term incentives vest if the company falls to DuluxGroup. This is the first time The Distillery has seen this reported, so compliments to Smith for digging a little deeper.

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