This week is set to be a key week for the Australian Dollar with the Reserve Bank of Australia (RBA) due to announce their latest interest rate decision in the early hours of Tuesday morning.
While the general consensus is for rates to be kept on hold it is by no means clear cut and there are many analysts that believe we could see the RBA cut interest rates this week. The recent downturn in the global economy, especially the worsening picture in China means that the Australian economy and therefore the Australian Dollar has suffered. The Aussie economy exports huge amounts of raw materials and China is one of their largest trade partners so as Chinese growth slows so does their requirements for Australian raw materials and hence the Australian economy, which is intrinsically linked to China, suffers.
A cut in interest rates generally makes a currency cheaper as investors would receive a lower return on any funds invested in that currency. As a result, a cheaper currency means that exports from that country become less expensive and therefore more desirable which in theory should lead to more trade taking place and funds moving through the economy. However, I would question whether a cut in interest rates and therefore weakening the Aussie Dollar is enough to help the economy. If China is under pressure and growth is slowing then will cheaper Australian raw materials be enough to help encourage them to produce more and help improve their economy? I personally think the problems in China are bigger than this and likely to get worse before they get better. For Australia to recover they will need to hope that they can generate other, large trading partners and become less reliant on China. In the meantime, Australian Dollar exchange rates are likely to remain volatile with the threat of an interest rate cut looming.