Australia holds interest rate steady, Aussie falls in forex trading. | CountingPips Forex & Currency Trading Blog

August 5, 2008 - Forex Economic News

Australia holds interest rate steady, Aussie falls in forex trading.

The Reserve Bank of Australia held its official cash lending rate unchanged today at 7.25 percent and the Australian dollar has been losing ground after the bank statement hinted that rate cuts may be coming soon. Australia had raised its interest rate by 25 basis points in each of February and March and has increased its rate four times since August 2007. Global Forex News Australia's cash rate is at its highest level since 1996 when it stood as high as 7.50 percent as the RBA has been trying to combat inflation rates that are exceeding the RBA's inflation target of 2 to 3 percent.

The RBA statement cited falling economic growth combined with high inflation as weighing on Australian household spending and business activity. Australia's Glenn Stevens, Governor of Monetary Policy, stated in the report that, "it is looking more likely that demand will remain subdued, and economic growth will be fairly slow, over the period ahead. Inflation is likely to remain relatively high in the short term, with the CPI affected by high global oil prices. Looking further ahead, inflation in both CPI and underlying terms is likely to decline over time, given the outlook for demand, provided wages growth remains moderate. The Bank’s forecast remains that inflation will fall below 3 per cent during 2010."

The RBA statement also signaled that a change in interest rate direction may be imminent as Gov. Stevens commented that, "Nonetheless, with demand slowing, the Board’s view is that scope to move towards a less restrictive stance of monetary policy in the period ahead is increasing."

The Australian dollar has fallen against most major currencies today with the signal of an interest rate reduction being a catalyst to sell AUD. The AUD/USD had traded above 0.9800 on July 15th and today touched under 0.9200 which is the lowest point for this pair since early April. The AUD/JPY, a popular carry trade pair, has also dropped today with the pair trading under 99.00 at one point after a recent high of approximately 104.50 on July 23rd. A carry trade is when a trader borrows funds in a low yielding currency to invest in a higher yielding currency. The trader earns the spread between the interest rate yields while trying to avoid a decrease in the exchange rate that will erode the yield profits. The Australian dollar has also taken a significant drop against its pacific rival the New Zealand dollar with the AUD/NZD hitting its lowest point since mid June at 1.2640.

AUD/USD Chart - The Australian dollar falls againt the US dollar today in forex trading(4H chart). The AUD has fallen two consecutive weeks against the USD.

Forex Chart

tags: aud, interest rate, RBA, forex market trading

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