Aussie Dollar Loses Ground as US Interest Rate Decision Looms

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The Aussie dollar is trading slightly lower against the greenback this morning. The dollar was down 0.27% at 2:00pm AEST, buying US$0.714.

Weighing on the local currency was yet another twist concerning the future of US interest rates.

Markets had initially ruled out the likelihood for a September rate hike last week. That came on the back of weeks of Chinese currency devaluations and stock market routs.

But the Fed has refused to rule out a first rate hike in nine years.

In addition, the US jobs report will also factor into the Fed’s decision. Due prior to the Fed’ meeting, it’s expected the report will show the economy added over 200,000 jobs last month. That would keep unemployment steady at 5.3%. And it could influence the Fed to lift rates.

Either way, it could have significant bearing on the Australian dollar. The RBA hopes a US rate rise can put further downward pressure on the Aussie.

Will the RBA meeting provide any hints for further rate cuts?

Looking ahead, there are some key events this week that could determine the direction of the Aussie dollar.

Chief among these is the Reserve Bank’s own decision on interest rates.

No one expects the RBA to lower rates when they meet on Tuesday. Analysts see less than a 10% chance of a rate cut this month. With the Aussie dollar nudging closer to US$0.70, the RBA won’t be eager to cut just yet.

But the likelihood of another cut before February next year remains high. And that’s what markets will be on the lookout for.

Of particular importance is how the RBA addresses the uneasiness in the global economy. What they say about China’s tremors, and the stock market retreat, will be telling. Like their US counterparts, China weighs heavily on any future policy decision.

That might lead the RBA to speed up plans and cut rates in response to China’s slowdown.

Why?

It’s because China’s yuan devaluation is a problem for Aussie exporters. It makes imports into China costlier, posing a direct risk to Australian commodity exporters.

Commodity currencies have taken a hit already in recent weeks. But they still rely on China to sell their goods. As it becomes more expensive to export to China, it puts interest rates back on the agenda.

Finally, the other thing to keep an eye on is the GDP growth figures due on Thursday.

Markets expect a 0.5% uptick in growth in the June quarter. That’d represent a 2.3% year-on-year rise.

The GDP figures should give us a better insight for where the Aussie economy sits. But it’s unlikely to factor into the RBA’s decision on rates. That’s because the RBA have stressed time and again that markets should lower their growth expectations.

Weaker growth won’t change the outlook on rates significantly. But it could set the platform for potential cuts over the next 3–4 months.

Aussie dollar down against most currencies

The Aussie dollar is also down against other major currencies in Monday morning trade.

The Aussie is down 0.74% against the Japanese yen. At 2:00pm AEST, the Aussie was buying 86.41 yen.

Meanwhile, the dollar is down 0.94% against the Euro too, buying €0.634.

Elsewhere in Europe, the Aussie dropped 0.36% against the British pound. At 2:00pm AEST, it was buying £0.46.

Mat Spasic,

Contributor, The Daily Reckoning

PS: The Reserve Bank will make its decision on interest rates on Tuesday. The RBA is likely to keep rates on hold at the current 2% low.

According to The Daily Reckoning’s Phillip J. Anderson, interest rates could remain low for a long time to come.

Phil’s written a brand new report, ‘Why Interest Rates Could Stay Low for the 21st Century’. In it, he warns that you won’t be able to rely on your savings to fund your retirement. As Phil says, inflation, from low rates, is eating into your savings. You can’t rely on savings accounts or term deposits for your retirement. The regular return on a term deposit has halved in the last four years alone!

That’s why Phil wants to show you the best way to invest in this low interest rate environment. He’s prepared a four pronged strategy that’ll boost your wealth. You’ll learn where to park your cash over the coming decades to profit immeasurably. To download the report, click here.

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