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RBA Decision Weakens the Aussie

Posted by WorldWideMarkets . on Nov 6, 2013 3:46:00 AM

The Australian dollar fell after the Reserve Bank of Australia left the benchmark interest rate unchanged at 2.5 percent but added that the domestic unit is still uncomfortably high and needed to fall to stoke economic growth. The question now is if the RBA will cut rates in the near future.

Rate futures currently price in 93.14 percent probability the RBA keeps the cash rate on hold at 2.5 percent at the meeting December 3. But further out, the RBA may well cut. The Australian dollar has matured in recent years to become the fifth most actively traded against the dollar, largely on the yield play and as a proxy play on China. But the Australian economy is still small by international standards and the aussie is not traded just as an international play but also on the fundamental underlying strength in the local economy. 

Australia has had many economic booms - and busts - going back to wool in its early colonial years and though it has much diversified, economic strength always tends to come in only one sector at one time. The last economic surge was in mining which has not been as resilient of late. To get the entire economy moving, the RBA could cut interest rates to help local consumption while reducing the attractiveness of the dollar which would bolster exports in areas outside mining.

Only last week the aussie climbed to a five-month peak which was always a dangerous play to chase, more so that just two months ago it was at a more than three year low. Those investors who saw the large gains in the aussie in recent weeks should enjoy the profits, but for those with less risk tolerance, the aussie should remain less than attractive. Much of the aussie gains came on a weaker greenback after the Fed left its stimulus package in place. The trend for the aussie even into the medium term is lower whether it be from the outlook for lower domestic Australian rates, changes in Chinese policy or the eventual decision by the Fed to taper stimulus which will bolster the greenback at the aussie's expense.

Note the sheep on the old two dollar note!Australian dollar two resized 600



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