On the first Tuesday of November every year, the Melbourne Cup is the event that “stops the nation”. Office workers, tradies, business owners, school kids, and sometimes even stock brokers, all drop what they’re doing, tune into the radio or switch on the TV and watch a 3,200 meter horse race for a little over 3 minutes at 3pm.
This date is also one of the 11 scheduled announcements by the Reserve Bank of Australia (RBA) for Monetary Policy. In other words, Interest Rate announcements, which are released at 2.30pm.
No matter what your inkling, there’s an opportunity to take a punt either way!
But unlike the Melbourne cup, where there are 24 starters in the field and only 1 winner, Interest Rates can only have one of three end results: 1) Rise, 2) Fall, or 3) Remain Steady. So the odds are actually in favour of being able to choose the right direction in Interest Rates than they are in choosing the winner of the Melbourne Cup!
There is much debate at the moment as to whether Australia is falling into a Recession or if this is just a slow economic period due to the current global economic situation (cue a reflection on the US, China and European economies). During weaker economic periods, which normally will reflect low Inflation, the RBA will lower rates in an effort to stimulate spending and lift the economy. The following chart shows Interest Rates since January 2011:
Note how rates were on hold through most of 2011, but as the global economic picture began to weaken, rates have been lowered to their current level at 3.25%. Although this is at its lowest level since October 2009, Australia still has one of the strongest Interest Rates in the developed world, putting us in a very strong position. So the RBA has been stimulating the economy, and if things do get a little worse, has room to lower rates even further.
Inflation figures were released on Wednesday 24th October, coming in much higher than expected at 1.4%. This is slightly higher than more recent quarters, but is well below the RBA’s target range of 2 to 3% inflation. So technically, there isn’t a reason for rates to be lowered any further.
But you and I both know that there are plenty of people struggling out there, and this isn’t just from watching A Current Affair. The proof is in the pudding. The RBA has lowered rates for a reason, with Unemployment creeping up slightly over the last 12-months, our Trade Balance being in a deficit since the beginning of the year, and Consumer Confidence mulling around long-term lows.
This coming Tuesday, punters will be placing a bet on their favourite horse while brokers will be watching the screens for the interest rate announcement. As the end results of both are unknown even to the most intellectual of analysts, we can all but speculate on the results. For the Melbourne Cup, we need to take a punt before the race to benefit. While for Interest Rate announcements, we can establish a strategy to benefit from price reactions after the result is known.
For this seasoned trader, however, I find it far more enjoyable to place my orders to react to the RBA’s announcement and then head to my local establishment to watch the Cup. Although I’ve never placed a bet on the race that stops the nation, I make the most of the atmosphere and the thrill of the race, knowing that my work is still being done through pre-allocated orders.
Maybe the RBA should put their own horse into the Melbourne Cup? That way, I’d have an excuse to choose a runner I knew a little more about.
US Stocks & Options Client Advisor
Halifax Investment Services
ASIC Australian Financial Services License Number – 225973