15.25 AEST, Tuesday 7 August 2012
Traders Call For Rate Cuts To Dampen Aussie Dollar
By Ben Taylor (Sales Trader, CMC Markets)
As expected the RBA kept interest rates at 3.5% today however traders are now calling for further rate cuts given the
dampening effect of the high Australian dollar.
The central bank has stated that our markets are reacting positively to the recent round of interest rate cuts. The
banks are comfortable with the current accommodative settings given the potential for Europe to provide adverse
consequences.
The dollar’s rise despite falls in commodity prices is a breakdown of traditional fundaments. This break down is now
starting to get noticed. The divergence has been caused by the widening of real interest rate spreads between the US and
Australia, expectations of further quantative easing and the unprecedented demand for Australian government bonds.
Recent inflation data also suggests further monetary policy easing will be necessary in the future. The higher
Australian dollar is compounding the disinflationary problem through lower import prices and the dampening effect of
exports.
Today’s local market continued the push higher following the increased prospect the European central bank will be taking
action sooner than later.
Expectations that Spain will now approach the Troika for a bailout is what is heating our markets up. Merkel’s tick of
approval to the ECB bond buying program is a big step towards appeasing these markets and has seen a significant
decrease in short term borrowing costs for both Spain and Italy.
Investors now wait for more details to immerge before betting the house on the next rally higher.
ENDS