125 Us To Aus – The Australian dollar fell to a 2-1/2-year low of 64.76 US cents yesterday, while shares rose. What happened?
The Australian dollar fell sharply on Tuesday after the Reserve Bank of Australia rose less than expected, falling 1 percent to 64.76 cents. The country’s currency was slightly higher than 65.10 cents on Wednesday, but was unable to recover much despite the weaker US dollar.
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The Aussie hit a 2-1/2-year low of 63.64 US cents last week, and fresh pressure this week signals a weakening global risk environment in currency markets.
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The latest decline in the Aussie dollar came after a 25 percent jump in the cash rate on Tuesday.
The central bank raised the nine-year official cash rate to 2.60 percent, saying further tightening was still needed, but defied market expectations for a 50 basis point hike.
It came as a surprise as the RBA is in the midst of its toughest policy in a generation as it joins other major central banks in trying to control rampant inflation. But while friends of the world are focused on destroying inflation, Governor Philip Lowe took a soft approach.
According to the RBA’s monetary policy statement, the central bank continues to focus on bringing inflation back to 2-3 percent, but has recognized the role of monetary policy now for consumers.
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“The value of cash has increased significantly in a short period of time,” the central bank said in a statement.
“As a result, the government has decided to raise the cash rate by 25 basis points this month as it assesses the outlook for inflation and growth in the Australian economy.”
The RBA said it plans to maintain a balance between curbing inflation and ensuring that rising interest rates do not slow economic growth.
The decision caused the biggest intraday drop in 3-year government bond yields since 2008, proving to be a problem for the Australian currency.
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Generally, higher interest rates increase the value of a country’s currency because they attract more foreign investment, which increases the demand for money.
But a rate cut here, even as other central banks raise rates more aggressively, means the gap between Australian and global interest rates is widening, putting pressure on the Aussie dollar.
“For currency traders, this means that the AUD/USD exchange rate could continue to decline. To reverse the bearish trend, we may need to see US Fed core and product demand recover from China,” market strategist Jessica Amir Saaxo Capital Markets said in a statement.
Ironically, the weakening of the local currency combined with the slow pace of interest rate hikes acted as a boost to the Australian stock market. The benchmark ASX 200 rose more than 4% on Tuesday and 1.4% on Wednesday.
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At first, stock market investors were very upset that the rapid increase in inflation (6 increases in as many months) is hurting economic growth and risk for households and businesses. Markets are taking Tuesday’s RBA decision as a sign that the end of the monetary tightening cycle may be in sight.
Shane Oliver, Chief Economist at AMP Capital, said the weakening global growth outlook and weak domestic consumer confidence are indicators of very weak conditions affecting jobs and fueling weak inflation.
“Hardly tightening all this without stopping the risk of choking and a recession in the Australian economy is not our thing,” he said in a note on why the RBA cut was the right thing to do.
Second, export-focused resources and energy companies and sensitive banks make up most of the Australian stock market weight.
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Australian mining and energy companies enjoy commodity prices and also earn US dollars from exports. A weakened Aussie dollar will help boost local businesses’ profits, giving them a double win.
Lenders also benefit from the slowdown in interest rates, as it reduces the risk of mortgage stress while improving the outlook for the real estate market, which accounts for the majority of the banking sector’s income.
Regardless of which way the Aussie dollar moves, the FX market is likely to remain stable for some time. This can actually be good news for experienced forex traders who are able to take advantage of large price movements.
High volatility also means the possibility of large losses. In fact, for every big profit a trader registers, someone on the other side takes a loss.
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Institutional investors also do not have direct access to the foreign exchange market. In order to trade the forex market directly in Australia, you usually need a lot of money and you need to be classified as an “advanced” investor.
This is why most forex brokers you’ll come across in Australia actually offer contracts for difference (CFDs). To learn more about how they work together, see our guide to forex trading.
Looking for an affordable online broker to invest in the stock market? Compare mutual trading platforms to start investing in stocks and ETFs.
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