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The shocking truth about the Aussie dollar and RBA interest rates in 2015

If you’ve got investments in term deposits, I’m sorry…

It’s going to be a long 2015 for you.

But before I tell you why, consider this…

If your term deposit is offering 2.5%pa now, imagine what it’s going to look like if interest rates drop another 0.5% in 2015.

Think I’m crazy?

I could be.

But both Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB) are predicting the Reserve Bank of Australia will drop interest rates twice in 2015!

Although I take all of the big banks’ forecasts with a grain of salt, I must admit they’ve got a compelling argument to make…

In NAB’s most recent business survey, Australia’s leading business bank said: “Soft commodities and labour market outlooks mean we have changed our rate call to two cuts of 25 bps [basis points] in March and August 2015, then on hold until late 2016.”

Further is news that its unemployment forecast was revised up to 6.75%, whilst GDP forecasts were lowered to 2.5% in 2014/2015 and 3% in 2015/2016.

Just last week, Westpac said the RBA will be forced to make, “two ‘insurance cuts’ in February and March 2015” with rate hikes thereafter.

It cited sharp falls in commodity prices and continued weakness in consumer sentiment as catalysts for the RBA to use some of its remaining scope in monetary policy by lowering rates.

Can you blame consumers for struggling to be upbeat when unemployment is rapidly rising?

Currently, unemployment stands at 6.2%.

This is in contrast to Australia and New Zealand Banking Group’s (ASX: ANZ) monthly job advertisement numbers which climbed 0.7% in November, or 10% year-on-year.

“Labour demand is gradually strengthening, with ANZ job ads rising for the sixth consecutive month in November,” said ANZ chief economist Warren Hogan. However, I find it hard to believe labour demand is strengthening. Maybe steadying would’ve been more appropriate.

Year-over-year, job ads in mining states, Queensland and Western Australia, are down 15.1% and 13.5%, respectively.

On the back of a 3.1% fall in the ANZ-Roy Morgan consumer confidence survey, Sky News today quoted Mr Hogan as saying: “We think a key question for monetary policy right now is: would rate cuts help build confidence or generate more concern and uncertainty about the future of the economy… Today’s number suggests that it may be the latter.”

Unfortunately, the big banks’ net profit margins – the difference between interest on deposits and loans – can be expected to fall if the cash rate continues to drop. I’d be willing to bet big bank bean counters are hoping rates stay where they are.

So what does poor GDP, consumer and business confidence, falling commodity prices, rising unemployment and a slowing housing market mean for the Aussie dollar?

It’s very likely it’ll continue to DROP!

So if you’re a sharemarket investor and you’ve made it this far, there are two key takeaways from this:

1 – Fixed income investments look set to underperform in 2015.

2 – Focus on finding stocks with reliable dividends and overseas exposure, to see your portfolio through the expected trough.

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Motley Fool Contributor Owen Raszkiewicz has no financial interest in any of the mentioned companies. You can follow Owen on Twitter @ASXinvest.

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