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How to profit from steady interest rates

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Nila Sweeney

 

The RBA’s decision to keep the interest rate steady at 4.25% came as a surprise, with most economists tipping a rate cut. How did markets react to the shock move and what does that mean for your investments?
 
Immediately after yesterday’s announcement was made, the Aussie dollar jumped by one cent to a six-month high of US$1.0812. The dollar also rose against the Euro, hitting a record high of €82.38c.
The dollar slightly fell this morning in the wake of doubts about a bailout for Greece, but still remains buoyed by yesterday’s decision.
 
“I would categorise the move in the Aussie as a limited upside”, said Emma Lawson, NAB’s currency strategist. 
 
Benny Sada, an analyst from the Australian Stock Report, expects the Aussie dollar to remain strong overall, even if the Reserve bank was to lower rates yesterday. 
 
“Our interest rate compares that favourably to the US where rates are zero, and this will support demand for the domestic currency”, said Sada.
 
Will the dollar hit US$1.10?
 
“We wouldn’t expect to see a sustained rise in the Aussie at that level”, says Lawson. Our terms of trade (the ratio describing what we receive for our exports relative to what we pay for imports) is declining and the Australian economy has already seen two rate cuts, she says.
 
IG Markets analyst Stan Shamu disagrees. He says most analysts now expect the dollar to reach $1.10 and beyond based on the improving risk appetite of global investors and continuing strong demand for our base metals.
 
What about the share market?
 
In response to the RBA’s decision, the S&P/ASX200 dropped 1%. By the day’s end, it fell 0.51%, whilst the All Ords closed 0.45% lower. The market was clearly caught off-guard by the steady interest rate, since 24 of 27 economists surveyed by Bloomberg had expected a rate cut. 
 
"Lower interest rates would have served to boost the competitiveness of shares and property compared with cash-based investments and bonds," Commsec’s Craig James told The Herald Sun.
 
Of the big four banks, NAB was the only stock to end the day on a lower price. NAB expects the Reserve Bank to cut interest rates in May.
 
So what should your strategy be?
 
Stan Shamu says many forex traders have held long positions on the Aussie dollar since late last year when it recovered from its November low of just above US$0.96.
 
“They should now be managing their stop levels so if the Aussie turns quickly they can still lock in some gains,” says Shamu.
 
He says most traders started to “buy in” to the dollar’s latest rally at around $1.01 so it may be time to start taking some profits.
 
Share investors also need to keep a close eye on any stocks they hold that have an inherent currency risk. A strong dollar, for instance, is not necessarily good news for Australian (non-mining) exporters.
 
However, it is an excellent indicator of continuing demand for Australian base metals and could underpin good gains for share investors who favour mining stocks.
 
-- By Jackie Pearson and Stephanie Hanna
 
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