Corruption Down Under? RBA Holds Rates

The Reserve Bank of Australia decided to hold interest rates at their present levels on Tuesday, Bloomberg reported. The bank's governor, Glenn Stevens, justified the rate halt on declining investment expectations for Australian industries outside of energy and mining.

The RBA's position may prove disastrous for Australian savers. The inflation rate has been steadily increasing, rising to 3.3% for the first quarter of 2011 from 2.7% for the fourth quarter of 2010.

The decision to halt rates at their present levels may be a move to support Australian retailers and exporters. Australia's rising interest rate has strengthened the Australian dollar. That may have had a bearish effect on Australian exports, as they become increasingly more expensive on the world market.

Interestingly, a few of RBA's board members have ties to the industries the depreciating Australian dollar most hurts. Jillian Broadbent, an RBA director, was recently appointed to the board of Woolworths, Australia's biggest retailer. Another director, Roger Corbett, is the Chairman of Fairfax Media. Yet another director, Graham Kraehe, is the Chairman of Australia's largest steelmaker.

Allowing inflation to spike in Australia for the benefit of the corporations RBA members have ties to may prove disastrous for the Australian economy. Inflation can spike swiftly under the right economic conditions, and Australia may be in danger of such an occurrence.

Action Items

Bullish: Traders who believe that the RBA will change their mind and raise rates in the near-term might want to consider the following trades:

• CurrencyShares Australian Dollar Trust (NYSE: FXA) A long play on the Australian dollar. The Australian dollar has appreciated against the U.S. dollar significantly this year, but may continue to do so if the RBA raises rates.
• iShares MSCI Australian Index Fund (NYSE: EWA) Attempts to return a value corresponding to the general strength of the Australian economy and may rally if foreign investors seek higher returns in Australian stocks.

Bearish: Traders who believe that the RBA will continue to neglect future rate increases may consider taking positions in the following:

• Bluescope Steel (PINK: BLSFF) is Australia's largest steel manufacturer. It might benefit from a depreciating Australian dollar
• Woolworths (PINK: WOLWF) is Australia's largest retailer. Stock of the company may do well if the Australian dollar does not appreciate.

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