Future Trading Assignment

Upon the meeting by the Reserve Bank, the interest rates can be expected to remain on hold at about 1.5 percent with some sectors like housing market likely to be key deciding factors.  The indication by Australian Securities Exchange is that there is a 99 percent probability that no much significant change for the month will be experienced. It could be expected a zero probability change in interest rates will be experienced in the market.  In addition to the industrial sector impacts on interest rates, inflation and low wages are other factors which have the capacity to influence the decision taken by the Reserve Bank board.  Another determining factor is that the Bank could be expected to keep the cash rate a bit steady and inflation at a low of 1.5 % as it has done in previous decisions. While headline inflation in the market could be predicted to be over 2 %, for the year, the is no likelihood that policy makers will result to changes in policies , probably seeing this as being consistent the economy’s sustainable growth , while at attaining targeted inflation for the same period.  With such an understanding, ASX’s 30 Day Interbank Cash Rate Futures contract can be used by the users in hedging against overnight cash rate fluctuations and therefore, manage daily cash exposures well.  It could also be expected that the Reserve Bank will aim at aim causing a certain level of inflation since the economy is seen as growing, and these rates can be considered as a rough proxy for influencing health in the economy.   The rising dollar is becoming a concern for the bank, with a further increase in Australia dollar, past or towards 80 US cents could be expected to provoke RBA to reduce interest rates so as to try lowering the dollar and hence, sustain competitiveness for the country’s exports. 

The economy is undergoing transition, after the end of a boom in mining investment which had about 2.5 % expansion back in 2016.  There is has been a strong rise in exports while non-mining investments have seen the same king of increase in the same year.  Many of the measures consumer and confidence were at, or over the average.  In the same year, growth in consumption was robust as the end of the year approached even though growth in other areas such as household income was just low.  The zero probability of change in could also be explained by consistent low target rates level in February and March.  Hence, banks remain at a good position to continue lending. The cash rate has been depreciating since 2013, which has helped the economy to continue transiting following the aforementioned investment boom.  The Reserve Bank could not be expected to favor a cash rate that is appreciating since this can complicate the economy adjustment.  The trend shows that RBA target rate decision has maintained interest rates at 1.5 percent and this has been the forecast all along and it has remained true.  Previously, the interbank rate in the country has risen to 2.11 % in March from the February rate of about 2.09 percent.   The expectation is that the rate will be about 1.73 by end of 8 march – 4 April period and beyond given the past trend and the possibility of continued inter-bank borrowing in future. Looking forward, it can be expected the rate to stand at 2.04 over a 12 months period in Australia.

 In various markets, conditions are seen strengthening and prices are quickly rising while in other markets there is a decline in prices.  The housing sector has influenced by growth in rents and growth in borrowing and hence increased interbank exchange, driven by more demand for investors. With an increase in leveraging, there has been observed some increased supervisory measures that have strengthened the lending standards with some banks taking more cautions with engaging in futures contracts and even lending out in some market segments.  The interest rates have been seen to be the lowest in the cycle while there has been more sentiment towards a lift in cash rate.  The following months on the other hand may see an upward trend in the cash rates. Therefore, in its considerations, the RBA would want a lot of monitoring in the increased lending between banks and to property investors and also monitoring on information on the performance of the economy since the previous slump.  In addition, with consistent tracking of inflation rate below the range targeted by RBA for about the past 3 years, it is possibly that tension in housing market would be a major reason for possible future lower cash rates. This would be observed even in the case of lower attempt to induce spending by RBA and hence increase the inflation rate.  There is also the probability that major banks could have increased the interest rates using the end of last year’ data to avoid an unforeseen hikes of the rate.  However, if the bank would keep the official rates lower than in previous times, banks could be expected to put on hold the increase in their interest rates.   

 External forces could also affect how the AUD vs USD plays out, with the possibility that some factors such as business decision by major trading partners such as United States rising the AUD/USD rates rises. The rates for US dollars have the capacity to reverberate globally, while anything happening in bond markets in US can impact on Australian rates. Without RBA intervention to influence the rates, target rates can be expected to increase gradually overtime.  Such a scenario can be very fatal for the corporations in that have large debts and would indicate a big shift away from the normal low interest rates that have been experienced in the past.  In the long-run the RBA would refrain from further changes believing that it had reduced interests so much that it should increase them finally. A rise in Australian dollar has the possibility of lead to further actions from the bank.