Cheap money lights fire under Aussie market index

THE US-initiated trade wars have ushered in a period of competitive devaluations as global markets reflect shrinking growth. The choice between New York and Sydney, or Beijing, has become easier in terms of exchange rates.

On Tuesday, the Australian Reserve Bank kept the pressure on the Australian dollar with a 25 basis point cut in the cash interest rate to 1 per cent. Later over dinner, I spoke with Philip Lowe, Governor of the Reserve Bank, and some board members. They were a little disappointed that the Australian dollar barely moved in reaction to cash rate cut, although philosophical about the general direction of the trend. The weakening of the Australian dollar is an essential objective of monetary policy as the Reserve Bank attempts to light a fire under Australian economic growth. Cheap money has however lit a fire under the Australian market index, which carries a currency bonus for Singapore investors looking for Australian investments.

The lack of movement in the Australian dollar suggests that the widely anticipated 25 basis point cut was "baked into the cake". It was the expected move, so the market had already taken this into account. This lack of movement does not mean that the Reserve Bank's objectives are not achievable. The long-term downtrend in the AUD is well established and under no immediate threat.