11.07.11

Aussie downgrades on Interest Rates Cut

The effects of the economic problems around the world can be seen in the latest evolution of the Australian Dollar. The problems around the world have caused all economies to weaken due to the decrease in demand and to the concerns of investors. The Australian Dollar has ended a week of losses against most of its major counterparts, especially the US Dollar and the Euro. This is both due to the negative fundamentals Australia is faced with at the moment and to the decision taken by the Australian Central Bank of cutting the value of the interest rates.

It is important to know that the Australian Dollar is very much dependant on the way in which commodities perform due to the fact that Australia’s economy is based especially on exports. The fact is that commodities are under a lot of pressure at the moment due to numerous negative factors around the world. One of the main issues is the global economic crisis which has caused problems in Europe, in the United States and in Asia. Even though this has been going on for a while and that political leaders are having lots of meetings discussing the problems are trying to find solutions, the fact is that there are numerous reasons why investors should be concerned and all these worries are causing the Australian Dollar to fall.

It is well known that Australia has very high interest rates as compared with other developed economies around the world. But the fact is that it is very difficult to maintain such high interest rates at difficult times such as the one we are facing now. It is due to this fact that the Reserve Bank of Australia has taken the decision of applying a cut to their lending rates. This is how the Cash Rate in Australia has been cut by 25 basis points to the level of 4.50 percent. However, the declaration made by the Reserve Bank of Australia’s Governor, Glenn Stevens, has not been incredibly dovish, because he has also included in his statement references to the positive developments in the global economy: “Financial markets have recovered somewhat from the turmoil of recent months, helped by stronger economic data in the United States and by signs that European governments are making progress in their efforts to deal with the sovereign debt and banking problems.” Moreover, not even his perspectives on the development of the Australian economy were pessimistic: “Information about the Australian economy suggests moderate growth overall. The terms of trade have now peaked and will decline somewhat in the near term, but they remain very high. In response, investment in the resources sector is picking up very strongly, with much more to come. Some related service sectors are enjoying better-than-average conditions.” He has also brought up the negative factors which have an influence on the economy at the moment, such as “cautious behaviour by householders” and the difficulties which can be seen on the labour market.

As a result of these measures, the inflation rate is expected to fall and to continue to stay in the bank’s target of 2 to 3 percent range. This means that the Central Bank of Australia thought that the monetary policy of the country has been a little too tight and this has caused them to take the decision of easing the policy a little.

Based on these facts, the Australian Dollar fell during the previous week. The AUD/USD pair decreased from 1.0707 to 1.0371, after previously reaching the low of 1.0202. The EUR/AUD pair grew from 1.3211 to 1.3292. The AUD/JPY pair has been very volatile, closing at 81.14 after opening at 81.03, but reaching levels of 79.63 and 83.95 during the week.

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