Pricing in a rate rise

The market has already substantially priced-in the impact of any rate rise imposed by the Reserve Bank (RBA) this week, according to a senior macro strategist with State Street Global Markets, Dwyfor Evans.

Evans told a conference of international investors today that if the RBA raised rates this week, it might have only a muted reaction on the local currency front because investors were already moving away from pure yield differentials as their core foreign exchange strategy.

“We think the Aussie should have further to go, and that 80 to 90 per cent of the impact of a rate hike is already priced in,” he said.

However, Evans said that continued uncertainty in global markets would be a key factor in the RBA’s ultimate decision this week.

“The broad data supporting a rate rise is strong, however, the RBA could realistically hold off for now given the implications of global markets,” he said.

“Our research shows further downside potential, which will only add to the risk aversion behaviour by investors,” Evans said.

He said State Street believed the severity in the downturn in the US had not yet been fully priced into markets.

“We think the weakness in the US market has been underplayed over the last few months, and that the slowdown is far deeper than people anticipated,” Evans said. “A typical housing cycle takes three to four years and we are only around a year or so into the downturn.”

However, he said global growth was no longer dependent on one engine, and this was particularly so in Australia.