Is an RBA interest rate cut coming?

The Australian dollar climbed further into uncomfortable territory overnight and this has increased expectations of an official interest rate cut in April.

What has happened?

Since it hit a low of just US68.28 cents earlier this year, the dollar has spiked nearly 12%. It rose another 1.3% overnight and is currently fetching US76.39 cents, although it did rise as high as US76.58 cents earlier.

Source: Yahoo! Finance

Source: Yahoo! Finance

Indeed, officials from the RBA have tried to “jawbone” the dollar down (although not so much in the statements for its official interest rate decisions). The Bank’s deputy Governor Phillip Lowe, for instance, has stated that he would prefer see the currency at about US65 cents in order to make Australian goods and services more competitive on a global scale.

The currency is now sitting nearly 15% above that target, and looks set to continue rising at least in the near-term.

Of course, jawboning has worked in the past because it acts as an indicator of the RBA’s intentions for the direction of future interest rates. The problem is, the RBA has also made its hesitance to reduce interest rates any further more than clear, which is pushing the dollar higher.

Although Australia’s cash rate is sitting at just 2%, it’s still higher than those of other countries. Foreign investors have been buying more US dollars in recent months upon expectations that its interest rates would rise gradually, but the Federal Reserve lowered its expectations for hikes for the remainder of 2016 on Wednesday. As such, the US dollar has weakened — and the Australian dollar has strengthened.

In addition, the Australian dollar is being bolstered by the rising iron ore price. The Australian dollar is very much a commodity currency, meaning it generally rises when commodity prices rise. The iron ore price climbed another 2.5% overnight and is sitting about 46% above its low levels from December 2015.

What happens now?

The RBA doesn’t want to cut rates any further. This is partially because it doesn’t want to add any more heat to house prices and partly because it recognises the need to have more flexibility in case the economy does worsen from here.

But it may have to rethink its position in the near future in order to stop the dollar from rising any further. According to the ASX’s RBA Rate Indicator, expectations of an interest rate cut in April are still low at 12%, but that has risen from an estimated 7% chance as at 11 March.

One way or another, high-yielding dividend shares are an attractive option to long-term investors.

Companies you could consider looking at to take advantage of the trend include Wesfarmers Ltd (ASX: WES) and Telstra Corporation Ltd (ASX: TLS). Indeed, you could also look at other dividend shares outside of the typical blue-chips which could generate great capital gains as well.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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