When is a Rate Cut Not Enough?

Burkhardt's picture

When is a Rate Cut Not Enough?
Justin Burkhardt | FXFocus.com

Today the Reserve Bank of Australia (RBA) cut the its rates by a quarter of a percentage point to 3.0 percent, as panic set in that the resources boom is fading quicker than anticipated. Note that rates have not been this low since the aftermath of the global financial crisis.  This strategic move was done in effort to rekindle the demand in some of the country’s weaker sectors in hopes that they would offset the rapid decline in the mining sector.
A declining mining sector will weigh in on the country’s trade balance and unemployment rates. Miners have already been forced to lay off thousands of workers as this industry begins to falter. The problem is that the boom is reaching a peak quicker than expected; the other sectors such as housing, retail, manufacturing and tourism continue to struggle so the outlook for Australia is not bright.
The risk outlook for global growth “is still seen to the downside, largely as a result of the situation in Europe, though the uncertainty over the course of US fiscal policy is also weighing on sentiment at present,” governor Glenn Stevens said in a statement.

A potential threat to Australia’s recovery is the strength of their home currency, which creates barriers for competition in a global market place. The currency has climbed 8 percent from its yearly low, which was reached back in June…. Just another barrier for them to overcome.
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FOREX Insights
The AUD.USD has undergone a fairly significant rally today as the Reserve Bank of Australia shave the cash rate by a quarter of a percent. But the pair ran into a strong level of resistance at $104.83. Since the upward thrust did not make a sustainable break through its resistance levels, I am anticipating that the next move will be bearish.
If we look at the daily chart, it’s clear that the AUD.USD has been forming some kind of wedge since late 2011 making lower highs and higher lows. My interpretation of what has taken place with the recent upswing was that it is simply retesting the trend line to the downside, so my goal is to buy on the retest. 
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Indicators On Watch

  • AUD Gross Domestic Product (Wednesday)
  • AUD Employment Change (Thursday)
  • AUD Employment Rate (Thursday)
  • AUD Trade Balance (Friday)


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Your currency analyst,

Justin Burkhardt

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Disclaimer: I have no positions in any of assets mentioned, but may initiate a (long or short) position in the AUDUSD over the next 72 hours

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payment expert's picture

A rate cut may not be enough but certaily can help if you decide to take conrol and manage the the spending, provided this cut really hits the market to the little guy in terms of Morgages, Card Rates, loans etc.


Usually these cuts are eaten on the negative balance sheets of banks and insrurance companies and do not produce, a reduction on he basic needs that are the main of the middle class.

fukidontknow's picture

No need for alarm there is no property bubble in Australia or New Zealand and nor could there ever be problems with our economies.

proof here


mt paul's picture


kangaroo scrotums ...

otto skorzeny's picture

you're next canucks-and the canadian real estate bust will be epic. at least all the guys that get laid off from commodity jobs can fall back on being fishing guides for Americans.

ForTheWorld's picture

Anecdotal employment/pricing evidence from Australia:

My wife works for a company that supplies hardware to mining companies. She's been at her current place of employment for about six months, and we went to the Christmas party that her employers held the other week. During the party, the senior managers announced that they were promoting someone to General Manager of some particular department. After that, they said there would be no lay offs from the company, but there would be staff movements and restructuring to weather the "economic storm".

A week later, my wife comes home saying that they made nine people redundant effective that day. The next day, another three. The day after that, they let go a manager who was the only one in his department that had more than six months experience in the company. Yesterday, two more were let go.

This company isn't very big - perhaps 500 employees at a guess. They've closed down sites in other states, and are getting rid of everyone they think they can do without. Cost cutting at it's most severe.

The same thing is happening at the mining company my sister works at. My best friend and the wife of another friend are waiting to hear whether they're two of 1300 employees to be made redundant by the NSW Government.

The company I work for is making stuff redundant in the most devastating way. They took a woman who had been here 20 years without any issues into a meeting room and told her that her position was being made redundant effective immediately, and when that woman got back to her desk, there was already a cardboard box on it.

Yet, if you were to listen to the talking heads, they'd tell you that Australia has "strong economic fundamentals, low unemployment rates blah blah blah". Price increases on utilities, public transit and insurance have been increasing at rates of 10%-15% depending on what is "allowed" by IPART. Wages of the majority of the people I know are stagnant.

Yet, the majority of Australians walk around with the "she'll be right, mate" attitude. Either that or the "I wanna fight ya, mate!" attitude.


Peter Pan's picture


In addition to your info, hundreds of mortgage brokers are getting rid of staff by slashing them or off shoring despite the inefficiencies involved. Banks have been getting rid of staff as have the telecommunications companies.

Most people are living from pay cheque to pay cheque and the credit card is still shoring up the leakages in people's budgets.

My youngest son is an apprentice electrician and his boss has been sub-contracting his employees to other electricians because work has been patchy.

Builders have been going broke and that in itself has unleashed a chain or heart ache as employees, sub-contractors, suppliers and the Taxation Office have been left empty handed. This in turn sets off a chain reaction with defaulting home loans which in turn sets the stage for liquidators, lawyers, debt collectors and the like.

Peter Pan's picture

I asked a friend who lives in the exclusive suburb of Vaucluse in Sydney where houses are for the most part over $3 million, how things are. His reply was, "if you are really quiet at night you can hear the prices falling."


Prices there have fallen by a good 25%.!!!

ebworthen's picture

Cutting rates, funny.

What, are they trying to emulate the U.S. FED?

Have all governments lost their grasp on reality?

It appears so.  Speculative bubbles pushed by banks and politicians are only expanded by central bank intervention.

The race to devaluation is on.  If Australia wants a cheaper exchange rate they need to print more money, but that is just another link in the chain of central bank slavery.

Sudden Debt's picture

It's called the "Monkey See, Monkey Do Strategy"... you clearly don't have a PHD in Nuclear Fusion Economics he? Else you would understand :)

otto skorzeny's picture

yes to both of your questions. a strong currency is viewed as evil by today's govts.