Australia’s Inverted Yield Curve – Update

Today, the RBA’s cash target and overnight rate is 3.50% compared to the yield on the Australian 10 year government bond of 3.33%.

The yield curve remains inverted. If the RBA cuts rates another 25 basis points to “un-invert” the curve, they risk a weakening of the AUD (which should be desired in order to make Australian exports competitive) as global capital will earn less on their carry trade and perhaps sending a signal that the economy actually needs a larger kick of stimulation that what was thought.

When I combine our observations in the credit markets, the analysis is suggesting (which is being confirmed with action seen Asian equity markets) that the short-term trends in the AUD and the ASX 200 are shifting into weakness.

It is worthy to note that the yield curve is close to being normal again.

At this stage, I view this short-term correction as an opportunity to accumulate selected Australian equities. I feel that the Aussie equities index (together with Shanghai) will see it’s low for 2012, a couple months earlier than the yearly lows that I anticipate to occur in the U.S. which surrounds the November period.

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