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RBA Cuts Rate to 3.25 Percent, China, Eurozone Woes Key Drivers

By Gary Kerdus
02 October 2012 05:27 GMT

THE TAKEAWAY: RBA cuts overnight benchmark rate by 25bps to 3.25 percent > Governor Stevens cited European, Chinese, and global slowdown as motivating factor > Aussie trades lower

The Australian Dollar traded lower versus its major counterparts as the Reserve Bank of Australia cut the overnight benchmark lending rate by 25 basis points to 3.25 percent. RBA Governor Glenn Stevens cited a “soft” global economy over recent weeks parlayed with a slowing China and depressed commodity prices as the likely catalyst underlying their decision. Moreover, Stevens touched on declining commodity export prices as falling by roughly 10 percent along with a high exchange rate and depressed European demand as additional risks to Aussie growth.

Prices for Chinese exports of hot rolled coil – a steel input used in infrastructure development – to the Eurozone is down roughly 25 percent over the last twelve months providing further evidence of ebbing European demand and supportive of the decline in Australia’s terms of trade. A weaker Aussie currency should help ease conversion costs and possibly provide a boost to the export led economy.

The Australian Dollar is highly sensitive to changes in interest rates as traders can earn yield by taking long positions and pairing with a currency that costs less to borrow in, like the greenback or the yen. However, a decline in rates, although generally supportive of export growth, may reduce incentive to hold the Aussie.

AUD/CAD, 1 Minute Chart

RBA_Cuts_Rate_to_3.25_Percent_China_Eurozone_Woes_Key_Drivers_body_Picture_1.png, RBA Cuts Rate to 3.25 Percent, China, Eurozone Woes Key Drivers

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02 October 2012 05:27 GMT