The US Federal Reserve is expected to cut interest rates this week, in an attempt to shield the US economy from growing global uncertainty.
Economists say that spells more good news for the Australian stockmarket, as people typically turn towards stocks and shares when central banks cut interest rates.
The Reserve Bank of Australia’s (RBA) recent rate cuts have already thrown that causal relationship into sharp relief, with people scrambling to find higher returns than those offered on their savings accounts, and the sharemarket reaching record highs as a result.
And AMP Capital senior economist Diana Mousina says a Fed rate cut would mean more of the same.
“Generally sharemarkets like it when central banks are cutting rates, or making liquidity easier and easing financial conditions,” Ms Mousina told The New Daily.
“So it will probably be positive for Australian shares, because they will take the lead from the US sharemarket and the rest of the world.”
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That a Fed rate cut would bring smiles to the faces of shareholders is widely accepted. But the trickier issue is determining what it means for the Aussie dollar.
A US rate cut would usually weaken the US dollar and push the Aussie dollar upwards.
But the fact the RBA is cutting rates in this cycle more than the Fed means Australia’s currency is likely to dip downwards – albeit not by much, as high iron ore and commodity prices mean the terms of trade are still quite high in Australia.
“So that’s preventing the Aussie dollar from falling too much,” Ms Mousina said.
Former ANZ chief economist and Treasury adviser Warren Hogan agreed, telling The New Daily that the Australian currency wouldn’t move much if the Fed cut rates as expected this week – largely because markets had priced in a Fed rate cut soon after the RBA cuts.
The real interest, he said, lies in what the Fed says it will do next.
“The Fed rate cut’s impacts have happened already, as markets are very much about getting in front of it and factoring in these things ahead of time,” Mr Hogan said.
“The big shift now for the markets is will the Fed be doing one or two cuts, or three of four?
“And if it looks like the Fed is only going to do two 25 basis point rate cuts and then sit for an extended period, then I think that’s the next move that’s going to be important for the markets and the RBA.
“That’s when you’ll probably see the Aussie drop to 67 or 68 cents, and maybe that would see bond yields rise a little bit.”
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Mr Hogan’s and Ms Mousina’s comments come amid speculation that the RBA will take rates even lower in a bid to meet its inflation target.
RBA Governor Philip Lowe confirmed last week that it hadn’t ruled out further cuts. And AMP Capital and Westpac are predicting a further two.
If the RBA does decide to take rates lower in the coming months, though, it will be because of weakness in the domestic economy, not because monetary levers were pulled overseas, according to Mr Hogan.
“I think the only triggers for a near-term rate cut from the RBA will be domestic data-driven – so whether you get a big surprise in inflation, or you get some real weakness in the employment numbers,” he said.
“I don’t see what happens in the overseas markets, what happens with global central banks, or even the currency for the matter, as being a trigger for another RBA rate cut in the next month or two.”