The Reserve Bank of Australia is almost certain to leave interest rates unchanged when they meet on Tuesday after the Australian dollar finally fell below its long-awaited target of US75 cents.
The central bank has been stuck between a rock and a hard place in recent times. On the one hand, it has been desperate to depreciate the dollar's value by 'jawboning' it downwards with the prospect of further interest rate cuts – a strategy that has lost its impact over the last few months. At the same time however, it has been under pressure to not lower interest rates any further due to the risk of causing a bubble in the nation's already inflated housing market.
Overnight, the Australian dollar plunged to a new six-year low of just US74.19 cents on the back of sluggish consumer spending, plunging commodity prices (including a 6% drop in the price of iron ore late last week) and results from the Greek bailout referendum which will likely see the embattled nation leave the Eurozone.
By 7:30am (Sydney time), the dollar had rebounded to trade at US74.74 cents, which is still comfortably below the Reserve Bank's target, making Tuesday's interest rate decision less complex.
Given the rapid slowdown in the mining boom, a weaker Australian dollar is seen as necessary to help rebalance the local economy and to promote growth in non-mining sectors. Indeed, a weaker currency will help boost our competitiveness against products offered by international rivals while it will also help to promote foreign investment in local corporations.
While a weaker dollar is good for the economy as a whole, it's also great for companies that generate a significant portion of their earnings overseas, including Westfield Corp Ltd (ASX: WFD), ResMed Inc. (CHESS) (ASX: RMD) and CSL Limited (ASX: CSL). As they repatriate their earnings back to Australia, the weaker currency boosts their returns in Australian-quoted dollars which is great news for local investors.
As a result of the situation currently unfolding in Europe, there's a good chance that the local market will be somewhat volatile this week, meaning investors could be given a great opportunity to buy these companies at an even more attractive level than their current prices. Stay tuned.
