Rate Cut

[Ninja]

If we see a rate cut on Friday I presume this will further devalue the rand and drive the ALSI strongly upwards? If we see no change I presume the alsi will dip and a strong cut (100pts or more) will drive a strong rally?

[SimonPB]

thursday, not friday.

[Ninja]

Sorry, Thursday.....is my understanding correct or is the rate cut fairly inconsequential to the alsi with Dow direction holding more sway.(already priced in)

[_nova]

Here's the dilema: Market is pricing more than 100 bps due to the threat to GDP and supported by retail deflation. The market is assuming on bealf of Tito... and that's almost always been a mistake. On the other hand Tito has to weigh the relative value of a rate cut against the potential weakening of the ZAR. If a 50 bps cut is good for the consumer, then how much damage will a ZAR at 2% or 3% weaker do to offset the benefit of a cut? The only outcome of a 100bps rate cut now is that the consumer will stretch the revolving credit even further and the household debt ratio will jump back to 80% and imports will get more expensive, completely off-setting the benefit. Its 50/50 we get 0 or 50bps, and 50 will probably be against Tito's better judgement.

[SimonPB]

nova, I disagree on 2 things. The market can't be pricing in 100 pts, gow can it when the consensus view (which means the majority view) is for 50 pts? Secondly, tito an the moc have oly one thing to worry about - cpix between 3-6 %. Nothing else is within their mandate, and they've never strayed from the mandate before - so why now ?

[Shaun_Siddall]

FAR curve is pricing in a 100% certainty of 100bps rate cut. Predicts the rate cutting cycle will end in Aug-09 bringing the cutting cycle to 450bps. The curve then prices in a possible hike in Jul-10 and then flat for the next 6yrs.

[SimonPB]

an if there is a cut today, it'll be max of 50 pts. if I was a betting man I would even put mney on that.

[#8]

So if theres a 50bps rate cut,we will see a drop?? as a 100bps is being priced in ryt?? and if theres no rate cut than we tank big tym ryt:)?????????

[DST]

Perhaps ( a big perhaps) they haven't. But if they (MPC members) are under pressure to keep CPIx between 3 and 6, and they actually cut rates when moneysupply was rising (2004 & 5), and then lifted timidly after the event while CPIx moved up to >13%, then their strict 'nothing else matters' mandate has led to them missing by more than 100%. Should they, or their mandate, be ignored - because they seem to be barking at a jumbo jet?

[_nova]

Sorry Simon, I should have said what Shaun just explained. This is straight from SBK Research "The FRA market is now pricing in more than a 100 bps cut at this week's policy meeting. Should the SARB not cut by 100 bps, the rand could sell off because a more modest cut (or no cut at all) would bode ill for SA's GDP growth prospects". You do have a point though, the SARB has a single minded focus on inflation. Either way, I reckon we're probably going to see the ZAR weaken considerably, and that IMHO is going to knock the stuffing out of the consumer via higher costs of imports. Will be good for commodity exports though, lower rates, more ZAR per USD, but also more expensive capex.

[SimonPB]

ya, I am not convinced by the FRA. 6 Months ago nobody had heard of it - now it is the most important thing ever? And having tracked the FOMC futures, they right some times, wrong some times - and that's a more advanced market.

[_nova]

100 bps will see us rally but whether it will sustain is another debate. No cut and we definitely tank some but I don't think too much as long as the US and EZ keep rallying. 50 bps and I think a bit of a rally and business as usual. I don't think anyone can really guess the outcome.

[Shaun_Siddall]

Simon it is only important if you work in lending or are a borrower. FAR curve has never been right. I have a nice graph comparing the curve predictions over the last 24 months. But with the curve been very optimistic and a chance of been wrong - it is the perfect time to fix your interest rates on loans etc for 3yrs. You get the immediate cash flow benefit and if you pv the differences between the current fixed rates for three years and a varibale rate Jibar would need to be as low as 6.20% to be out of the money by the end of three years. A perfect hedge and extra cash flow from day 1.