# What happens when interest rates are cut?



## curionaa (13 November 2008)

As you may know RBA is set for another interest cuts next month and some saying it would be full 100 points cut. I current hold 30k in US dollars and wondering if interest cuts next month will the AUD value drops? or is it a good time now to exchange it with the today's value 1.55870  Any opinions will be appreciated.


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## korrupt_1 (13 November 2008)

*Re: What happen when interest cuts*

normally when the RBA cuts interest rates, the currency goes down. so in normally conditions, the AUD will fall against other currency pairs.

I stress the word 'normally', because what the market is going through is hardly normal...

so to answer your question... hold onto your USD until after the rate cut to maximise exchange rate gains.

however, DYOR...


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## skc (13 November 2008)

*Re: What happen when interest cuts*



korrupt_1 said:


> normally when the RBA cuts interest rates, the currency goes down. so in normally conditions, the AUD will fall against other currency pairs.
> 
> I stress the word 'normally', because what the market is going through is hardly normal...
> 
> ...




The movement of the AUD following the interest rate cut depends also on whether there are differences between the expected cut vs the actual cut. In last two cuts, the RBA "surprised" the market by making larger cuts than what is already priced in, creating significant short term fluctuations in the cross rate.


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## Pairs Trader (13 November 2008)

the market will always have done its best to price in the expected cut and usually the market is right, so come the actual day of the cut announcement speculators will bail out of their positions depending on how big the cut was and usually you will see a bounce(sell the rumour, buy the news) so waiting wouldn't be recommended. AUD/USD has a good general correlation with the Dow Jones Index, its a risk sensitive asset and thus moves up and down with fear sentiment, so your speculating when locking in a rate.


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## Glen48 (13 November 2008)

Word is the USD will have to go down due to USA debt IF this is the case which currency will take over Euro or the Yen as is it worth while buying one or the other now????


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## tech/a (13 November 2008)

RBA propped p the AUD at 60c so dont expect it to fall below that.


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## curionaa (13 November 2008)

tech/a said:


> RBA propped p the AUD at 60c so dont expect it to fall below that.




RBA admitted that they bought their own AUD dollar to keep the dollar from severe falling and they had bought more than 3 times since last month. I'm just waiting for another 1.64 to USD that happened on last month. Fingers crossed.


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## skyQuake (13 November 2008)

Agree with tech/a

60 had to be broken cause there were a significant number of barrier oppies there... Don't think we'll see anything close to 60 for a while...


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## 20 seconds Lance (13 November 2008)

Interest rate parity is one of the stronger relationships that influences fx movements. As Korrupt said, normally this relationship holds strongerst, i.e. the opportunity to gain arbitrage profits by buying (sell) spot and selling (buying)fwd and borrowing/investing in between, would keep fx rates at a reasonably predictable exhange.  However, i've been surprised by the strengthening of a currency that has the economy which seems to be in the biggest downturn ( another normal or general fx theory). But even more surprised by correlation of the stock market movement and aussie dollar price, I guess their is a significant Yen carry trade. So in answering your question; i've got no idea, but i like to look at broader economic implications and relations to currency movements, rather than a technical point of view. Only because i believe in the efficency of the fx market to certain a degree. I hope this helps.


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## Glen48 (13 November 2008)

What is the general opinion about rates or will they have to go up to help the banks?
I see CBA has allowed almost $1B for bad debt's and it is just the start of the down turn.


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