The prospect of a short-term interest rate rise is beginning to weaken as the financial markets now expect the Reserve Bank to hold fire while the Australian dollar remains at one-year highs and hampers the economic recovery.
The dollar dropped sharply during the trading session yesterday, as the currency became swept up in the negative sentiment towards equities, with the sharemarket losing 1.4 per cent or 65 points.
The dollar opened at US86.49c at the start of the international foreign exchange trading sessions but began to weaken in line with Australian equities once the local sharemarket opened.
It fell to a low of US85.44c, but last night had regained ground to be at US85.73c. The dollar has been trading at a 12-month high since late last week.
However, a weaker-than-expected run of economic data in Australia has pared back the chances that the RBA will start its tightening of monetary policy in the next few months.
The interbank futures market had been priced for a 45 per cent likelihood that the official cash rate would be lifted by 25 basis points at the central bank's October policy meeting in a fortnight.
But that chance has now slipped to 17 per cent. The expectation for the cash rate in the year ahead has also started to be reduced.
The markets had predicted the cash rate would be almost 5 per cent by September next year, implying at least seven moves of 25 basis points each. But that expectation has now been cut back to 4.5 per cent.
The rates markets are expected to take a lead today from the publication of RBA minutes for the September meeting.
The run of negative data was extended yesterday when new lending finance figures, published by the Australian Bureau of Statistics, showed Australian business and consumers were still concerned about borrowing.
There was a 1.7 per cent fall in housing lending, seasonally adjusted, ahead of 1 per cent drop in commercial finance and a 0.8 per cent decline in personal lending during July.
TD Securities strategist Annette Beacher said there was still a case, based on lending, retail sales and the 27,000 jobs lost in August, that should convince the RBA to maintain the current "emergency" rate settings to ensure sustainable growth.
"The RBA is likely to be unpleasantly surprised by these recent events, and we believe past hawkishness could be diluted in the coming weeks," she said.
"We're of the view that there is no case for an interest rate rise, and the onus is now on the next batch of data to see even a tightening bias maintained from the RBA."
Ms Beacher said the current strength of the dollar could endanger economic growth in Australia, especially from exports, and worsen the current trade balance.
"A sleeper is the Australian dollar surge. The $A is a hand-brake on growth and at near US86c, the $A is kneecapping export revenues," she said.
"In tandem, the strong $A also locks in falling import prices, keeping a lid on inflation in the year ahead."
The benchmark S&P/ASX 200 index fell 65 points yesterday to 4531.1, while the broader All Ordinaries index dropped 60.2 points, or 1.31 per cent, to 4536.1.
On the Sydney Futures Exchange, the September share price index futures contract was down 69 points to 4529, on a volume of 79,284 contracts.
"The market's been a little bit subdued today. Some profit-taking on financial stocks on Friday night (on US markets) really did spark a bit of a sell-off of financials (in Australia) today," CMC Markets market analyst David Taylor said.
"There's a bit of profit-taking and consolidation."
