On Monday 5 October at 11:30 PM, the Reserve Bank of Australia (RBA) will announce its decision regarding interest rates. The Australian interest rate was previously measured at 2%, but in the 25 years between 1990 – 2015 the Australian interest rate averaged 5.04%. In much the same way as the Fed in the U.S., interest rate decisions have a seismic effect on the value of currencies. If the RBA decides that the Australian economy has recovered sufficiently, a decision to raise interest rates would theoretically be justified.
By raising rates, the RBA is effectively embarking on a policy of quantitative tightening at a time where struggling economies in the region are adopting quantitative easing measures to stimulate economic activity by increasing the velocity of money flow. It is particularly interesting to evaluate the impact of an RBA rate hike on the AUD/USD pair.
What Factors Should We Consider in the Upcoming RBA Decision?
At 04:30 AM GMT, the RBA will announce its decision vis-à-vis interest rates in Australia. The forecast rate is 2%, the consensus rate is 2% and the prevailing interest rate is 2%. Given that the International Monetary Fund (IMF) has been pressuring central banks around the world NOT to raise interest rates at this critical juncture, it is safe to assume that the RBA will follow suit. Indeed, the world's strongest economy – the U.S. – decided against hiking rates at the last Fed pow-wow on September 16-17. That Janet Yellen and the FOMC decided against raising rates surprised a few people. But the weakness in China is causing all sorts of market anxiety, coupled with excessive downward pressure on commodities prices across the board.
If Australia adopts a dovish tone, the RBA will refrain from making changes. The AUD/USD pair will not be adversely affected. A rate hike on the other hand will cause the AUD to become more valuable relative to the USD and greenbacks will be exchanged for Australian dollars. Since the yield on USD is low – in terms of cash holdings, CDs or interest-bearing accounts – the AUD would be inherently more attractive to international investors.
