This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Reserve Bank Cuts Rate; Australian Dollar Set for Further Weakness

Stocks in this article: FXA

NEW YORK ( TheStreet) -- At its May monetary policy meeting, the Reserve Bank of Australia (RBA) lowered its benchmark interest rate by 25 basis points, to 2.75%. This is a new record low for the central bank.

The statement accompanying the decision showed the rate cut came as a result of concerns for the macroeconomic picture in Australia, and as an attempt to speed up the sluggish pace of recovery.

Specifically, the RBA cited elevated currency values as being particularly problematic, limiting export and manufacturing prospects and contributing to rising unemployment on a national level.

Comments from RBA Governor Glenn Stevens essentially suggested that elevated values in the Australian dollar are not an accurate reflection of the underlying fundamentals, with export prices in the commodities sector showing weakness and interest rates already low by historical standards.

The May rate reduction was the seventh cut in the last 19 months and was expected by roughly half the market. With consumer inflation at moderate levels, mining spending topping out and credit growth holding at subdued levels, the RBA still has room to ease its monetary policy if prolonged declines are seen in broader growth rates.

Currently, interbank cash-rate futures show that traders are betting the RBA will leave rates on hold at its June meeting before cutting the benchmark at least once more in the third quarter. Futures contracts indicate there is a 68% chance of a "no change" rate decision at the June 4 RBA meeting, while the September futures show the rate will be 2.5% after the summer.

Causes for Concern

Rate reductions are supportive for stock values and the Australian benchmark S&P/ASX 200 is trading back near its yearly highs after the announcement. The reverse is true for currency values, however, and the Australian dollar is now trading back near its yearly lows against its U.S. counterpart. This activity is reflected in ETFs such as the CurrencyShares Australian Dollar Trust (FXA), which is already trading at its lowest levels since last October. The inability of markets to find buyers at these yearly lows suggests that the next downside target is parity with the U.S. dollar, a valuation level that has not been breached in the last 10 months.

To gain some perspective of what these valuations mean, it is important to look at historical averages. Between 1990 and 2006, Australia's currency didn't rise above 85 U.S. cents, but the aussie hasn't fallen back below that level in nearly three years.

1 of 2

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,569.95 +213.08 1.23%
S&P 500 2,037.24 +24.35 1.21%
NASDAQ 4,706.8440 +62.5320 1.35%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs