Aussie Dollar on Hold before RBA Interest Rate Decision


Peter Lavelle, 22.11.2012

Latest Exchange Rate Changes

This table shows you the difference you would have received exchanging Australian dollars at the highest versus the lowest point in the past week.

UK pound to Australian $: 0.68%
Euro to Australian $: 0.88%
US $ to Australian $: 0.72%

The Australian dollar was broadly unchanged this week, moving just a fifth of a cent against the UK pound and euro, and less than half a cent against the US dollar. This reflects a trend we've seen since the beginning of October, whereby the Aussie dollar has broadly moved lower, but only in very slow increments.

The reason the Australian dollar moved so little this week is that the market is awaiting direction from the Reserve Bank of Australia. There, it's deeply uncertain if the central bank will cut interest rates in December. If it does, that will make buying Australian bonds less profitable for investors, and cause the Aussie dollar to fall more rapidly. However, as I mention, this fall in the Aussie isn't guaranteed, as an interest rate cut is by no means certain.

What Affected the Aussie Dollar This Week

The RBA weighs up a further interest rate cut

Whether the Reserve Bank cuts interest rates in December, thereby contributing to a fall in the Australian dollar, looks like a finely balanced thing. The central bank has already cut rates five times since last year, moving them from 4.75% to 3.25%, in an attempt to compensate for the slowdown in global growth. Were the RBA to do so again, it would take Australia back to the 'emergency' 3.0% level last seen during the financial crash.

Lower interest rates would compensate for the end of the mining boom

In support of an interest rate cut, the chief engine of the Australian economy this decade, the mining boom, is due to peak in 2013. Given that, the RBA could be convinced to cut interest rates again, to make borrowing cheaper, and so stimulate growth in other sectors of the economy to compensate. This would help Australia continue its streak of 21 years without a recession.

But lower rates would also risk a housing bubble

But on the other hand, house prices in Australia are already high. If the central bank cuts rate again, it could therefore trigger a borrowing boom, or bubble, whereby people take up mortgages that they can only afford while loans are cheap. This could then store up a potential crash, for when the bank needs to move interest rates higher again later.

How this Affects your Australian Dollar Transfers

An interest rate cut is good if you want to buy Australian dollars

As you can see then, it's by no means clear whether the Reserve Bank will cut interest rates next month or not. However, if you intend to exchange currencies to buy the Australian dollar, it would be beneficial for you if the bank did. This is because, as I've explained, an interest rate cut would cause the Aussie dollar to fall in value. That makes it cheaper, which means when you exchange other currencies to buy the Australian dollar, you'll get a higher total.

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