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Round Up – Australia Rate Decision & Easing Tensions in the Ukraine

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The Reserve Bank of Australia (RBA) held its cash rate unchanged at 2.5%. This move was not entirely unexpected, the RBA had been backing away from a potential rate hike over the past 2 weeks. RBA Governor, Glenn Stevens, confirmed the Bank’s ‘neutral’ stance toward monetary policy for the foreseeable future. In his post meeting statement, Stevens referred to inflation expectations as being ‘consistent with the 2–3 per cent target over the next two years’. Stevens also noted that ‘the Bank expects unemployment to rise further before it peaks’.

The RBA’s statement cited the declining Australian Dollar as likely to provide a boost to the economy, although it was noted that the AUD remains high by historical standards. This morning’s central bank announcement brought an immediate sell off in the Aussie, dropping 35 points to .8913 against the US Dollar before gradually recovering to pre-announcement levels as market participants digested the RBA’s accompanying statement.

Beyond Australia, the crises in the Ukraine cooled a little overnight as Russia brought an end to military exercises on the border. President Putin ordered his troops to return to their bases by the end of this week. The global impact of this stepping down of forces was an immediate pricing out of the risk premium we have seen build up over the past week. Energy and Food prices fell across the board, particularly Oil, Natural Gas, Wheat and Corn as the threat of supply disruption to these commodities dissipated.

The market impact of reducing tensions in The Ukraine was felt most by Russia. The Micex index, a measure of Russian stocks, posted almost 3% gains overnight following a drop of more than 10% yesterday. The Ruble also came off historic lows this morning to record a gain 0.7% against the US Dollar. There has been no reversal of yesterday’s sudden interest rate hike to 7%, this higher yield combined with a lowering of risk should continue to push the Ruble higher until the Central Bank of Russia reverses this emergency policy decision.

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