The Australian Dollar, on the Right Path?

Today, the Australian dollar was one of the top movers as the Central Bank decided to cut again the interest rate, reducing it to an historical low, at 2.5%. Even if this decision makes the Aussie dollar depreciate and therefore makes it less attractive for the investors, it is intended to help the economy get back to growth. Lately, Australians have had a less encouraging economic climate as the country’s economy kept deteriorating. One of the major concerns is the growing unemployment rate which pointed to 5.7% as well as a serious breakdown of the mining industry.

As two of the core industries are the coal and iron ore, a slowdown of one of them is seriously affecting the overall picture. China is at fault for these negative news, as its economy is cooling. If previously they used to invest significant amounts of money in their infrastructure and building factories, increasing the demand of natural resources from Australia, now, the leaders of China would rather not to boost the economy for a while. The slowing down of the mining industry is expected to cause further damages like: increasing the unemployment rate, reducing the investments, affecting the exports and the price of these resources. On the medium term (until the final of 2013), the Australian economy will be closely watched before additional measures will be taken, as they are not excluded.

Much Ado About Nothing

Today Mario Draghi had to fight with the same rush of the investors that Ben Bernanke encountered yesterday. Everybody was interested in any major change that could happen in the short term, like the possibility of modifying the interest rate. As just last month was announced that they would maintained the low interest rate for an “extended period of time” it’s logical that no important changes were expected today, especially because the economy didn’t report major changes (like the inflation exceeding the 2% threshold). To sum up, a trace of optimism was kept, as the economy is expected to recover at a slow pace.

The U.S. data maintained the optimism of the last days as the ISM Manufacturing Index achieved a rating of 55.4 points (as last month got 50.9 points). The manufacturing industry is gaining momentum and pledges to sustain further positive numbers for the indicators of the labour market. Speaking about the labour market, this month were registered fewer unemployment claims (326k), value that reaches a minimum level of May 2013. Likewise, an extra vote was added for the QE3 tapering that is due to happen in September. Gold price is likely to remain in the last 2 weeks’ range at least until a final decision is taken regarding the moment of taper of the monetary stimulus program.

What Did FOMC Decide?

FOMC announced to keep the interest rate at 0.25% and not much information about the QE3. The program is maintained at the previous parameters with no given data for an eventual tapering. On the other side, the inflation becomes an alarming issue as “persistently below its 2% objective could pose risks to economic performance”. In this regard, and taking in consideration the continuation of the monetary stimulus program, economists are expecting the core inflation to rich 2% in the medium term.

Earlier today, good news came for the American economy, as signs of recovery appear to become increasingly more consistent. The ADP report came up better than expected (200k), possibly giving the tone to the NFP that is waited on Friday. Broadly, this result is sustained by the services sector which created 177k jobs, the biggest gain since last November. The labour market demonstrated the fact that the turbulences given by the cuts in government spendings, fiscal issues and tax increases were safely overcome. The advanced GDP release (1.7%), the version that tends to have the most of the impact, showed that the worse of the financial problems are being left behind.

Obama Gives Hope to the Middle Class

President Obama expressed his satisfaction regarding the evolution of the American economy and highlighted the importance of the wellness of the middle class in order to have the economy running at optimal parameters. Also, the creation of jobs represents the main concern, giving the fact that creating jobs is the nucleus of the American economy. If Americans work hard, every field of the economy will run smoothly. In order to rich this point, reforms are needed and consumers need to understand and accept further changes in this regard.

As the spotlight is the unemployment rate problem, further measures are considered: a revolution of the manufacturing industry, a new tax credit, plans for rebuilding the infrastructure, simplifying of the tax code , simplifying the procedures for investments and starting small businesses, large investments in renewable energy (wind and solar energy), rising the minimum wage.

On the other side of the planet, the interest rate of Australia is likely to be lowered again, the second time this year, as the latest inflation data doesn’t look disturbing (currently 2.4%, dropping from 2.5% in the second quarter of the year). The governor of RBA believes that there is still room for this move and further depreciation of the currency is not a surprise. The consumption still needs to be stimulated and the consumers need to trust their economy enough to start investing in more risky assets. As a measure of fighting the decreasing trend that the Australian economy is following lately, especially because its main exporter China is slowing as well, the Central Bank is willing to boost employment by residential constructions. Today, the building approvals were reported down to -6.9% a considerable drop that seems to darken the overall picture.