OCR and RBA

OCR at 1.75 is currently below every monthly average from 1 to 10 years. To understand the current low position in OCR, extreme bottoms are found at 1.69, 1.47, 1.42 and 1.12 although 1.12 is not only ever expected but 1.12 places 1.69, 1.47 and 1.42 at far richter scale extremes. Further cuts by the RBA can only take OCR to 1.69 and 1.47 but it informs the economic situation in Australia is much worse than previously anticipated particularly in the Trade Ables V Non Trade Ables as both are Australia’s measure of overall production and exchange rate levels.

The RBA is not expected to move OCR particularly as it lacks our criteria to move. Viewed from July 2006 and well beyond, the RBA generally moves OCR in May and November and December because budget years occur around June and July. The RBA moved OCR in July 3 times since 1990 and those years were 1997, 1996 and 1993.

The RBA moved OCR once in June. In the past 10 years, the RBA moved OCR 5 times in May, 6 times in November and 3 times in December. The common theme for the RBA is to move OCR in 6 month intervals starting from May to November and December. The only times to move OCR other than May, November and December is to not follow the normal patterns and hold the market guessing. Only on rare economic occasions such as June, October and December 2012 would the RBA cut in successive order.

For OCR to head higher and have any chance at normalization again, breaks must occur at the 1 year monthly average at 1.96, 2.00 and the 2 and 3 year averages at 2.16 and 2.28. Then the range becomes 2.28 to 2.49 with the next big line to cross at 2.50. Current OCR is oversold and any moves lower only forces more oversold in all averages from 1 to 10 years. If OCR ever breaks 1.96 and 2.00 then its the first sign the RBA normalizes again although not expected any time soon.

Like UK’s Sonia, OCR natural interest rate equilibrium is found at 2.86. Overall, OCR is not only low but current levels are literally on the floor. Targets begin at 1.87, 1.91, 2.01, 2.03, 2.09, 2.12, 2.23 and 2.39. Undr such oversold the RBA is not expected to lower OCR again.

Brian Twomey, Inside the Currency Market, btwomey.com contact brian@btwomey.com

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