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Australian dollar spikes higher, will rates follow?

18
July
2017
News
news, Australian economy, Global economy, SMSF, Equity, Fixed Income, Property

Aussie Aussie Aussie!” you could almost hear the Australian Reserve Bank cheer this month. Tuesday’s release of the RBA minutes put financial markets into a tail spin. Friday night’s US data started the stronger Aussie trend. US inflation failed to impress – showing a second drop in 3 months. Analysts believed that the US Federal Reserve was less likely to push ahead with the removal of stimulus and policy tightening measures; meaning a lower interest rate differential between Australian and US interest rates. The Australian dollar (AUD) dutifully responded, adding 1 cent from ~75.40c US.

Tuesday’s release of the RBA minutes saw the AUD spike to two year highs; over 79c. Instead of the minutes providing a warning shot across the bow to the highly indebted households of Australia, the foreign exchange markets took things to a whole new level.

The RBA minutes estimated the level of a “neutral” cash rate, and it wasn’t the current 1.5%. Instead it was 3.5%, suggesting an addition of 2% of rate increases. This is the first time in a long time that the RBA has signalled such strong intentions. Prime Minister Malcom Turnbull added that the RBA was just trying to signal that the interest rate trend is now going to be higher, and that households shouldn’t get over committed. He added it is now a time for prudence in financial affairs, and to heed your “Grandmother’s advice” of paying down home loans as principal plus interest.

Ironically the stronger Australian dollar makes Australian exports less competitive and to some extent acts in a similar measure to an interest rate increase. The stronger currency may actually defer interest rate movements to the first half of 2018.

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