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AUD CRASHES ON SURPRISE INTEREST RATE CUT; STOCKS RALLY

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AUD CRASHES ON SURPRISE INTEREST RATE CUT; STOCKS RALLY

Feb 3 2015, 8.49am GMT

STOCK.com

The Reserve Bank of Australia cut the country’s key rate to 2.25% due to AUD over value.

The record low interest rate for Australia, now down 25 basis points from 2.5% to 2.25%, was reduced on Tuesday morning GMT leading to a mini-crash in the Australian dollar and soaring stocks.

AUDUSD slumped by 2.2% on Tuesday’s trading after the announcement and stands at the 0.764 mark.

Sydney200 [ASX200 Australia] was up on daily trading by 1.2%, a continuation of an upward movement since 19 January when stocks have risen 8.2%.

RBA governor Glenn Stevens referred to the continent’s monetary easing policy, which has been in place for 18 months after the last rate reduction, giving enough time for the policy to take effect: “The board has taken time to assess the effects of the substantial easing in policy that had already been put in place and monitored developments in Australia and abroad.”

However, now the effects of the drop in iron ore prices force the RBA into another rate reduction as the central bank attempts to halt deflation in the commodity-centric country. Iron ore comprises a fifth of export income. Stephens added, “The Australian dollar has declined noticeably against a rising U.S. dollar over recent months, though less so against a basket of currencies. It remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices. A lower exchange rate is likely to be needed to achieve balanced growth in the economy.”

Bloomberg reported that traders are pricing in a better than 40% chance that the RBA will cut rates by another quarter point at the next meeting in March.

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