RBA Taking China's Market Slump in Stride Keeps Rate Bets Split

  • Governor Stevens didn't comment on yuan devaluation decision
  • ``Bottom line is RBA isn't concerned,'' CBA's Capurso says

Bond bulls watching Australia’s central bank and expecting a hint of panic about the market meltdown in China have so far been disappointed: Governor Glenn Stevens is barely batting an eyelid.

While the Reserve Bank of Australia head referred in Tuesday’s policy statement to “some further softening in conditions in China” and recent equity market volatility, he refrained from mentioning the Aug. 11 devaluation of the Chinese yuan that sent global markets reeling. The Aussie dollar’s drop to a six-year low is helping cushion the economy and giving the RBA room to keep the benchmark interest rate at a record-low 2 percent following reductions in May and February.

“The bottom line is that the RBA isn’t concerned about China,” said Joseph Capurso, a currency strategist at Commonwealth Bank of Australia in Sydney. “It doesn’t look like the RBA is going to be cutting rates this year. The risk for the Aussie is that it rises from here if the market’s rate-cut pricing is taken out.”

Chinese stocks fell Tuesday, extending the biggest two-month tumble since 2008, after an official factory gauge slumped to a three-year low and concern grew that government intervention to shore up equities will fail. China is Australia’s largest trading partner.

The turmoil in China comes at a time when Australia is already dealing with massive business investment cuts and falling prices for its main commodity shipments. The South Pacific nation’s economy expanded 0.2 percent last quarter, the weakest growth in more than four years, and half the pace economists had forecast, government data released Wednesday showed.

Sluggish Growth

“Most of the available information suggests that moderate expansion in the economy continues,” Stevens said in his statement after the policy meeting. “Key commodity prices are much lower than a year ago, in part reflecting increased supply.”

The RBA usually emphasizes increased supply, not falling demand, when discussing commodity prices, said CBA’s Capurso. China’s falling equities won’t impact retail spending or businesses there, he said.

The Australian economy last contracted in the first quarter of 2011 and the nation hasn’t experienced a recession in more than two decades.

Swaps imply a 28 percent chance that Stevens and his board will lower the benchmark rate to 1.75 percent at their October meeting and a 53 percent chance of a move the following month.

A drop in the Australian dollar, which makes exports more competitive, has so far helped the central bank hold back from further easing. The Aussie has declined 14 percent this year and slid to 69.82 U.S. cents on Wednesday, the weakest since April 2009. It bought 70.14 cents as of 11:51 a.m. in Sydney.

“They’re just waiting to see more information as to whether the market volatility leads to a sharper slowdown than what they were penciling in,” said Kieran Davies, the Sydney-based chief economist for Australia at Barclays Plc. “In the short-term though they’d be happy that at least the currency was heading lower, so it’s operating as something of a safety valve for them.”

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