Home News How to profit from steady interest rates

How to profit from steady interest rates

Font size :
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
 
Sign up to our free e-newsletter to receive other helpful tips!

Whether you are looking to buy your first home, move home, refinance, or invest in property, a mortgage broker can help. Access loans from all the major lenders, get help with paperwork – plus there is no charge for this service. Get help from a local mortgage broker

Mortgage News and Articles

Mortgage applications drop in second quarter Mortgage applications drop in second quarter

This marks the “beginning” of a downward trend, says Equifax executive Read more

To break monopoly, many smaller lenders could become banks To break monopoly, many smaller lenders could become banks The proposed change could break the Big Four’s monopoly over the mortgage market and help families get cheaper home loan rates ... Read more

Borrowing against the home: A strategy to pay for aged care Borrowing against the home: A strategy to pay for aged care Such debts can generally be divided into long-term and short-term loans ... Read more

NAB slashes growth forecasts for houses, units NAB slashes growth forecasts for houses, units Numerous factors, including tighter credit rules and the growing supply of new stock, have reined in Australia’s seemingly unstoppable housing market boom ... Read more

More mortgage news and articles

Sponsored Links

Sunday, Jul 23, 2017
Top Featured Rates
Top Bank Rates

Get help choosing the right home loan

Whether you're a first homebuyer, looking to refinance, or investing, it's important to have the right loan for your needs. Just fill in a few details below and one of our trusted mortgage advisers will contact you.

A quick & easy way to find the right home loan
  • Purpose of mortgage
  • Household Income
    $
  • How much do you want to borrow?
    $
  • How much deposit do you have?
    $
  • How much is your house worth?
    $
  • How much do you still owe on your mortgage?
    $
  • What type of mortgage do you have?


  • How much is your new home?
    $
  • How much do you want to borrow?
    $
  • How soon do you want a mortgage?
Next
  • First name
  • Last name
  • Where do you live?
  • Phone number

Special Offers

Related Keywords