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October 2015

China Dominates the Aussie Rate Debate

Published: Tuesday 06 October 2015

The Reserve Bank of Australia chose to leave the base rate on hold at the historic low of 2.0% when they met on 6th October. That's the fifth month in a row that they have sat on their hands; clearly uncertain about the future of the Australian economy and for good reason.
 
They cited concerns over slowing growth and the fragility of the global economy but made no more than a passing comment on the greatest influence of all; the Chinese economy. From the slowdown in China springs the fall in global share prices, the slump in commodity demand and the consequential dive in commodity prices. All of these things have an influence on Australia; a major exporter of raw materials with an economy that has traditionally relied on mining and extraction for its growth.
 
It is highly unlikely China will rebound in the near future; the government funded construction boom is over and the slow recovery in the global economy is making it hard for Chinese exporters to keep up their production levels.  Without that recovery in demand, there is unlikely to be any pressure on the Reserve Bank of Australia to move interest rates upward in the next 12-18 months although there may be cause to cut the base rate further. Hence, the Australian Dollar is likely to remain subdued for the foreseeable future.
 
However, having peaked at nearly A$2.24 in August, the correction in the value of the Pound has brought the Sterling – Australian Dollar rate back to A$2.13 at the time of writing. From a technical perspective, some sort of correction was significantly overdue. The GBP-AUD rate had climbed from A$1.44 at the beginning of 2013 to that heady height of A$2.24 with barely a backward glance. A dip to A$2.05 is perfectly possible without disrupting the upward momentum but if we reach A$2.00, there is a significant risk of a fall to A$1.95.