Interest Rate Cut Fells the Aussie Dollar, But Will it Fall Further?

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Peter Lavelle - 4.10.2012 - about the 27th September to 4th October 2012.

This is intended as a brief guide to movements in the Aussie exchange rate, to put you in the best position for when you exchange currencies.

Latest exchange rate changes

  • Pound to Australian dollar: 1.555 to 1.5742 (+1.235%)
  • US dollar to Australian dollar: 0.9576 to 0.9771 (+2.036%)
  • Euro to Australian dollar: 1.2368 to 1.2651 (+2.288%)

Ouch - that's gotta hurt! As we can see here, the Australian dollar fell against all three of its biggest rivals this week, taking its biggest losses against the euro.

australian money and euros

This is owing to a one-two punch that left the antipode currency out for the count, starting with a shock interest rate cut from the Reserve Bank of Australia, and ending with Australia's biggest trade deficit in half a decade.

However, though the Aussie suffered big losses this week, some economists were surprised it didn't fall further. Is that on the cards looking ahead?

Why did the Aussie Dollar Fall this Week?

The RBA gets out its scissors

Reason numero uno that the Australian dollar fell this week is a surprise rate cut from the Reserve Bank of Australia. The RBA slashed its benchmark rate -0.25% to 3.25%, despite forecasts it would hold it steady.

What accounts for the RBA being so happy-go-lucky with its central bank scissors? Well, Governor Glenn Stevens reckons the mining boom will peak in 2013. He's therefore eager to rebalance the economy toward sectors that have suffered in the boom, like manufacturing and tourism.

Given that, lower interest rates will make it easier for these business to borrow, stimulating growth, while hitting the value of the Aussie dollar, encouraging foreign custom.

Australia posts a record trade deficit

Second of all, as the Reserve Bank cut rates on Tuesday, trade figures released on Wednesday reveal the Aussie economic outlook is tougher than ever.

Australia posted a -$2.03 billion trade deficit in August, way above forecasts and its worst result since March 2008, in the depths of the financial crisis. This is because, simply put, the value of the commodities on which Australia depends like coal and iron ore have tanked, making it harder and harder to make a profit.

Will the Australian Dollar Keep Falling?

So the Aussie dollar had a tough week. That's fantastic news if you intend to relocate Down Under, because of course it means when you buy Australian dollars you get a higher total. But will the antipode currency keep falling?

In fact, there's an awful lot holding the Australian dollar up. Not least is the fact that Australian bonds and equities are among the most profitable in the world right now, creating an endless supply of buyers for the Aussie currency.

If you want to buy government debt, and are faced with either the choice of German bonds, yielding practically nothing, and Australian bonds, yielding 2.00%-3.00%, it's a no-brainer which one you choose.

That means that, though there's scope for the Aussie to fall further, as the RBA again yields its axe, we're not going to see it skydive or anything like that. It's still just too, too attractive to foreign investors on the hunt for returns.

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