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Traders Call For Rate Cuts To Dampen Aussie Dollar

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

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