The outlook for rates and the Aussie dollar

Investment Committee, Switzer Dividend Growth Fund
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The Reserve Bank of Australia (RBA) cut rates by 125 basis points in 2012 as Australian business conditions continued to weaken. The mining sector capex slowdown, lower bulk commodity prices, ongoing fiscal contraction (particularly by the state governments who need to maintain their high credit ratings) and the higher Aussie dollar have all contributed to the creation of challenging operating conditions. The March and August corporate reporting periods last year confirmed this with the deceleration of earnings combined with a very subdued earnings outlook.

Chart 1: Australian Business Conditions. Broad based business survey illustrates the tough operating environment. Lower rates and a lower AUD will help.

The current Australian cash rate of 3.0% may be at the recent global financial crisis (GFC) lows, however it remains the highest yielding cash rate (in both real and nominal terms) among the developed economies globally. Further, the funding costs are higher versus the pre GFC levels, therefore the average domestic mortgage (or small business loan) remains historically high. Chart 2 shows the RBA Cash Rate historically and the Implied Cash Futures Curve into early 2014. The market is looking for lower rates and for rates to remain lower for longer.

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