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Economics

A$ > 6 month high despite falling rates

Here she goes again.

The Australian dollar hit a six month high while you were asleep and is now close to US$1.08.

The catalyst? Better than expected jobs numbers in the US and optimism surrounding a possible deal on the Greek debt crisis.

The Aussie usually does well when there’s good news about the global economy.

It also does well when interest rates locally are high, because international investors get more bang for their buck.

But that’s the interesting thing.

Interest rates are expected to fall tomorrow, when the Reserve Bank board meets for the second time this year.

The markets have priced in a very good chance that we’ll see the official cash rate decline to 4 per cent.

Technically, that should mean a weaker Australian dollar, but because it’s not falling, it adds to the theory that our currency is shifting from a risk currency to a more reserve currency as the greenback and euro decline from their previous strongholds.

Australia’s commodity boom is keeping demand for the Australian dollar strong, as too the relative resilience of our economy.

There’s also a very good chance Australia’s major banks may not pass on tomorrow’s interest rate cut. Many have been warning over the past few weeks of rising borrowing costs, or wholesale funding costs because of the European debt crisis.

These days, banks are relying more on international funds for loans, instead of domestic deposits.

Despite Australians saving at the highest rate in 30 years, international borrowing costs are rising, and the banks are having a hard time convincing Australians of this, and how it’s hitting their bottom line, especially when they’re posting record profits.

On their side however, are global credit ratings. Fitch last week threatened to downgrade Australia’s big four by one notch because of their reliance on international wholesale credit markets.

Don’t be surprised if you hear the banks refer to this if they don’t pass on any or all of the RBA’s rate cut.

MEMO>ricardo

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