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If you read our work regularly over the past year, you know we’ve been long Australia on several occasions. Under the firm management of Glenn Stevens, the Reserve Bank of Australia managed to keep the Australian economy under control during the unprecedented run up in the cost of base metals and energy commodities in 2007/2008. As a result, the Australians have been able to enjoy a softer landing with their extra rate cushion which has left plenty of room to cut. Now that the benchmark rate has been slashed to a 45 year low of 3.25% however, the reality of Australia’s dependence on external demand for commodities has sunk in; the projections in yesterday’s National Bank report were for a contraction of 0.25% in ‘09 with growth turning positive finally in 2010. Also released yesterday was the NAB business confidence survey (charted below) which, not surprisingly, registered levels that are at an all time low.

Still there are glimmers of hope on the horizon. As the reflation theme develops in the coming months, the land down under may be among the first to reap the benefits. In fact there are signs that it may have already begun. The Baltic Dry sub Index for the crossing from Western Australia to Beilun/Baoshan, a heavy traffic area for iron ore and other basic materials, has increased by almost 70% YTD –over 65% in this month alone (compared with a 6.6% decline in the ASX all ordinaries YTD). We will be keeping our eye on Australia: when sentiment becomes so overwhelmingly negative, positive data points on the margin can sometimes have a major impact.