# Why did AUD strengthen after RBA rate cut?



## helpme (6 August 2016)

This is weird. I am dumb-founded. Why did AUD strengthen after RBA(Reserve Bank of Australia) cut benchmark interest rate to an ALL-TIME LOW on 2Aug16? Economics 101 says that a currency should weaken after a rate cut. When RBA cut rate in Apr 2016, AUD tumbled. Why did it strengthen this time?

Can someone wiser enlighten? Thank you very much.


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## luutzu (6 August 2016)

helpme said:


> This is weird. I am dumb-founded. Why did AUD strengthen after RBA(Reserve Bank of Australia) cut benchmark interest rate to an ALL-TIME LOW on 2Aug16? Economics 101 says that a currency should weaken after a rate cut. When RBA cut rate in Apr 2016, AUD tumbled. Why did it strengthen this time?
> 
> Can someone wiser enlighten? Thank you very much.




There's that "everything else being equal" disclaimer use in economics theory.

Me no wiser and only guessing here... but it could weaken due to the UK also lowering its rates; weaken against the US or whatever you're comparing to due to those country either also cutting rates or the market didn't see those economies as favourable as Australia's.


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## Klogg (6 August 2016)

helpme said:


> Economics 101 says that a currency should weaken after a rate cut




Yes, and other economic theory suggests that markets are 100% efficient. Empirical evidence blows that one up, yet they still teach it in school/university...

Perhaps expectations were for a 50bps cut. Or perhaps people expected a more dovish statement from the RBA. There are so many possible causes.


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## CanOz (6 August 2016)

Actually the market dropped nearly 40 pips on the announcement. It recovered most likely because :

A) according to the bond yields it had already been priced in and

B) the wording on the RBA statement was not dovish enough to stem the massive inflows into the bonds from those in search of yield.


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## prawn_86 (7 August 2016)

Klogg said:


> Yes, and other economic theory suggests that markets are 100% efficient. Empirical evidence blows that one up, yet they still teach it in school/university...




I would argue that if any market is 100% efficient it is the currency markets. There is so much volume/liquidity, inputs and information, it is nearly impossible for it to be inefficient (bar the odd case of leaked information early, but once that info becomes available it is instantly priced in)


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## cynic (7 August 2016)

The psychological barrier that became apparent back when the AUD rocketed to parity with the greenback, was all the evidence I needed to view the EMH with the disdain it so clearly deserves.


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## minwa (7 August 2016)

helpme said:


> Economics 101 says that a currency should weaken after a rate cut.




This is why economists teach at university for an average salary. A conspiratorial theorist may say that economics taught in the mainstream education system is designed by the truly rich & powerful to keep the population in the smokes of what really goes on.

Prices are driven by market force. In the case of currency, it is mostly the will of the central bank. It's that simple - people with more money than you bend it to go down, there is no need link any economic explanation to it.


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## Klogg (8 August 2016)

prawn_86 said:


> I would argue that if any market is 100% efficient it is the currency markets. There is so much volume/liquidity, inputs and information, it is nearly impossible for it to be inefficient (bar the odd case of leaked information early, but once that info becomes available it is instantly priced in)




No market is 100% efficient. Inefficiencies aren't large, but they exist.


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