Underlying inflation unexpectedly slowed in the period 12 months to June. At 2.7%, this lies within the Reserve Bank of Australia’s target range of 2 to 3%. As a result it is unlikely that the RBA will lift interest rates next week. In fact it is not implausible that rates will remain on hold (at 4.5%) for the next few months (the Labor Government will certainly be pleased with this).
The previously proposed 40 per cent profits tax can certainly be blamed for the AUD dropping from US92.77c to US81.04c over a six week period. As a RBA board member recently stated ”the idea that you announce a tax on the mining industry at the time a sovereign risk crisis is going on in Europe is stunning to me”. The AUD is now trading around the US89c mark.
[Sovereign Risk is the risk of a government becoming unwilling or unable to meet its loan obligations, or reneging on loans it guarantees]
The reduced likelihood of near-term interest rate rises, better than expected company profits, and strong performance among regional markets (i.e. Japan, Hong Kong and China) have all attributed to pushing Australian shares higher.
Although US house prices have risen above expected levels in May, the US economy still remains a concern. Thankfully the Asian economies (that are powering along) are having a tremendous positive influence on our economy. But, as Niall Ferguson (Harvard University Professor of Economics) was recently quoted “these Asian economies alone cannot propel the world into a sustained growth pattern”. However, the can and are offsetting the negatives effects of the US economy on ours.
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