It seems the Reserve Bank of Australia made a boo-boo.
In their announcement of the recent rate cut, the RBA – intentionally or otherwise – dropped the language that indicated that the outlook for rates was still negative.
Bond and currency traders jumped for joy in the belief that Australia had seen its last rate cut, and the AUD and bond prices soared. This obviously defeated the purpose of the rate cut, which was used in the hope of finally forcing the Aussie Dollar under US$0.75.
A soaring AUD is very bad news for Fortescue Metals Group Limited (ASX: FMG), which relies on a lower Australian dollar in order to keep its mines profitable – especially after its recent issue of debt costing 9.75% interest per annum.
Westfield Corp Ltd (ASX: WFD) has also felt the pain recently; given that its primary source of income is in US dollars, it was one of the first stocks to soar when the AUD unwound and will be one of the first to fall should our dollar keep rising.
Fairfax media has started tipping that the RBA will reintroduce an 'easing bias' into its future monthly meetings in the hope of starting the AUD on a downward slide again, but I think the damage has been done.
With the potential for a property bubble as investors capitalise on low rates, it's hard to imagine the RBA pushing rates any lower – certainly I don't think anybody wants to see 0% interest rates or crazy negative bond yields in Australia any time soon.
An ageing population taking on extra risk in order to juice their returns – like with Commonwealth Bank of Australia (ASX: CBA) shares recently – and extra pressure on the pension system at a time when the government is trying to save every cent will pressure the RBA to keep rates static, 'easing bias' or not.
One thing is certain though, high-quality dividend stocks just became more valuable than ever.
