Record low interest rates? Bring it on! In their latest policy statement, RBA officials decided to cut rates by 0.25% from 2.25% to an all-time low of 2.00%, marking their second interest rate cut so far this year.
For the newbies out there who are wondering why interest rates are such a huge deal, allow me to give y’all a quick explanation. You see, the central bank’s benchmark interest rate sets the bar for borrowing rates offered by commercial banks and for returns on investments. While an interest rate cut could wind up encouraging lending activity at cheaper rates, it also means that securities in that country would offer lower returns, eventually resulting to weaker demand for these assets and the local currency.
With that, an interest rate cut typically results to currency depreciation… but this wasn’t the case for the latest RBA cut and AUD/USD!
AUD/USD had been consolidating at the start of the week, with traders biting their nails ahead of the RBA statement. When the rate cut was announced, the pair dipped briefly below the short-term range but zoomed right back up. What in the forex world was that all about?!
As my buddy Pip Diddy mentioned in his Asian Session Recap, forex market participants have already been betting on an RBA rate cut ever since Governor Stevens revealed that policymakers actually came close to cutting rates in their previous meeting. He even added that further easing of monetary policy conditions might be appropriate, as commodity prices have continued to drop and business investment has been lagging.
Because of that, traders who have shorted the Aussie over the past few weeks decided to book profits when they found out they were right. Governor Stevens’ reassuring comments on stronger employment prospects and improving housing demand also provided a boost for the currency, as market watchers felt a little more confident that the RBA’s recent easing efforts could translate to better economic performance later on.
Although Stevens made another swipe at the Aussie’s overvalued exchange rate, analysts remarked that the latest statement was a more balanced one. After all, policymakers sounded hopeful that their latest rate cut would bear fruit and result to improved growth and inflation readings sooner or later. Do you think this is the last of the RBA’s rate cuts this year? Or are they gearing up for more?
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