Pounds to Australian Dollar Outlook: The Reserve Bank of Australia cut Australian Interest rates by 75 bp to 5.25%, the biggest of the G7 bunch and more than 50 bp forecast as well as the third cut since September. The total drop in australian interest rates is now 200 bp. Despite a visible drop in demand from China and other emerging countries, Australia will probably have only a shallow recession this year and next, so the cuts are precautionary as well as a response to dipping domestic data like retail sales.
As a general rule, rate cuts are bad for a currency. This time the Australian Dollar rose from an overnight low at 65.97¢ to 68.29¢. The question is whether it will test the recent high at 68.93 from Oct 30. We don’t have a good explanation except that traders like decisive action, presumably think lower rates will work to keep the economy humming along, and the big move in a short while may suffice, leaving the Australian Dollar as the highest yielder in a world that generally seeks carry trade yield.
Market News offers an interesting contribution. Deputy RBA Gov Battellino raised questions about further rate cuts, saying "the cycle in the Australian housing market, rather than following the US market, is in fact at a more advanced stage; it is probably leading the US market by three years or so… The Australian housing market was at its hottest in 2003, whereas the US market peaked in 2006." Battellino also mentioned a “persistent inflation overhang” that makes it harder for the RBA to manage the economy.
We say this is interesting but not useful - regardless of the condition of the housing market, Australia cannot escape global consequences, including demand destruction for commodities.
Argh well at least Australian Mortgages are falling!
Pounds to Australian Dollars currently 2.3073
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Barbara Rockefeller
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