The Australian dollar ended this week with losses against some majors, including the US currency and the euro, as the negative fundamentals caused Australia’s central bank to cut its main interest rate.
The Australian currency (often called the “Aussie”) depends on the performance of commodities as Australia’s economy is based on export. And commodities are under heavy pressure from various negative factors these days. The debt problems in Europe, the signs of an economic slowdown in the United States and Asia — there are enough reasons for investors to be worried and these worries undermine appeal of the Aussie.
Australia has rather high interest rates, compared to the developed economies. Such high levels of borrowing costs can be hard to maintain during times of an economic turbulence, such as one we see at present. The Reserve Bank of Australia also thought that the high level of the lending rates is unsustainable and cut its main Cash Rate by 25 basis points to 4.50 percent.
The statement of Bank’s Governor Glenn Stevens wasn’t particularly dovish, though, as he mentioned 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.
His view on Australia’s economy wasn’t pessimistic either:
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.
Stevens mentioned negative factors like “cautious behaviour by households” and the problems of the labor market. The inflation is expected to decline and stay in the bank’s target 2 to 3 percent range. Overall, the central bank considered the monetary policy a little bit tighter than required and that lead to the decision to somewhat ease the policy.
AUD/USD fell from 1.0707 to 1.0371, while reached the low of 1.0202 during this week. EUR/AUD advanced from 1.3211 to 1.3292. AUD/JPY was extremely volatile during this week. The currency pair closed at 81.14, not far from the opening level of 81.03, but over the last five day it managed to fall as low as 79.63 and rise as high as 83.95.
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