Lower Aussie dollar continues to put pressure on interest rates: Mark Armstrong
This Sunday I am flying out to Thailand to get away from this bloody cold weather. When I booked my trip a few months ago I though my timing was perfect as the Aussie dollar was flying high.
However, just three months later it has fallen back to earth. I don’t tell you this to make you jealous of my trip but to me this is a clear sign fixed rates are at the bottom of the cycle.
A high Australian dollar is not good for the Australian economy because our exporters products look less appealing to international buyers. This in turn puts pressure on manufacturing industry and unemployment.
Higher interest rates in Australia in comparison to the rest of the western world makes our dollar an attractive safe haven in uncertain times as it will produce a higher return.
The RBA really only has one tool at its disposal to put downward pressure on the dollar and that is to lower interest rates and this has been a large part of their thinking in recent times.
A combination of lower interest rates and the announcement from the US Federal Reserve that they plan to stop quantitative easing (read print more money) has lead to a sharp fall in the Aussie dollar.
The graph below illustrates how quickly it has slid. The dollar was above $1.05 US dollars less than three months ago and now sits around 91 cents. This means the purchasing power an international buyer of our products has had a 10% boost and in theory this should give our exporters a kick start.
On the other hand we do not want to see the Aussie dollar fall to far as this will mean many of our imports, including the laptop I am writing on, will become more expensive. For the RBA it is like walking a tight rope and it is vital they get the balance right.
The fall in the dollar will take pressure off interest rates and will bring closer the time when the RBA begins to lift the cash rate. It is not a question of if they will lift rates but simply when.
This is where the banks come into the frame. Their job is to project into the future to determine where rates will be at some future date. The price they pay for money will be based on these projections and this will have an impact on the price they sell it to you and me.
Last Friday we saw an indication of what they are thinking as the ANZ bank lifted their three-year fixed rate from 4.99% to 5.19%. This could mean the bank has sold all its cheap money and is now hedging its bets or they are stepping back from these fixed rates.
While the other major banks are yet to follow I think this is a clear sign that now is the time to lock in.
Warren Buffet lives by an investment mantra that says ‘I would rather be vaguely right than precisely wrong’. His investment philosophy is to use all the available information at his disposal to make educated decisions that mean he might not get the timing right every time but he is happy to be close enough to work in his favour. It is now close enough!
Mark Armstrong is a director of iProperty Plan, which provides independent analysis and tailored advice to investors and home buyers.