Aussie Dollar May Keep Pressure Off Interest Rates

Your correspondent doesn’t pretend to be the great know-all and predictor of everything. There’s two very good reasons for that – we don’t know-all, and we can’t predict everything with any great accuracy. What we think we do rather well is state the bleeding obvious.

One would have thought that there wasn’t much traction in stating the obvious or using a bit of old fashioned common sense. Au contraire. Unfortunately, or fortunately for us, much of the action around financial markets involves bigger measures of hubris than it does of common sense.

Yesterday the All Ordinaries Index fell by over 1%. The reason? An increased expectation of a further interest rate rise. Er, surely that should have been priced into the market already. In fact we rather thought it had been. It appears that although it had been reflected in the foreign exchange rate of the Australian dollar, those in the equity markets hadn’t realised this happening, so only reacted to it yesterday.

In yesterday’s Markets and Money, Dan Denning pointed out that the Australian dollar may increasingly benefit from its strong performance against the US dollar as fund managers run for their lives from US fixed interest assets such as mortgage backed securities.

This could be just what the interest rate doctor ordered, and could very well save the Reserve Bank of Australia’s bacon over its do-nothing inflation policy. Supposing fund managers do rush to enter the Australian market looking for a ‘risk-free’ interest rate of around 6.25%, the rush to buy Aussie dollars may help to keep some of the pressure off interest rates.

However, the inflation genie is notoriously stubborn when it comes to being shoved back in the bottle – especially when it has already been released and has gorged itself in the meantime.

Add on to this the reports that due to the drought, water irrigation allocations to farms in the Murray-Darling Basin area could be curtailed leading to a shortage of supply and therefore increased prices which would… push up inflation and… put a bit more pressure on interest rates.

Kris Sayce
Markets and Money

Kris Sayce

Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Markets and Money e-newsletter in 2005.
He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.

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