The Aussie dollar steadied today around 72.5 US cents after a period of volatility yesterday.
Perhaps markets had already priced in the Federal Reserve’s move to raise interest rates by the time it was officially announced early this morning.
The real story however, is that there will be a growing discrepancy between the Federal Reserve in the US and the RBA in Australia.
With an RBA cash rate that currently sits at 1.5%, the Fed is targeting another three rate hikes in 2019.
For two years the RBA cash rate has been at historic lows:
As covered earlier, this could flag further falls in the dollar.
Even with improving commodities prices, if there is a growing gap between US and Aussie interest rates, pressure will build.
What do we mean by pressure?
In a nutshell, a big difference between interest rates in Australia and the US leads to a slowing of foreign investment.
Aussie dollar walking a tightrope
As our largest foreign investor, US companies could choose to keep their money at home rather than invest it here.
If there is a downturn in Australia, the RBA has little room to manoeuvre.
It’s like walking a tightrope.
A sharp downturn in the housing market could spark a loan default epidemic, especially amongst those with interest-only loans.
The housing market is already falling.
It is also worth remembering that Aussie banks source some of their funding from the US.
This will make it harder for Aussie banks to keep interest rates down — Westpac has already raised its interest rates earlier this year.
Where all this leaves the Aussie dollar, we will find out in the coming months.
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