Here’s why the RBA could cut interest rates TWICE in 2016

Credit: Benny

The strength of the Australian dollar has taken investors by complete surprise so far this year, and it could soon force the Reserve Bank of Australia into action.

The local currency is currently fetching just over US75.5 cents, which marks a rise of roughly 3.7% since the beginning of the year. Even more shockingly, it has surged 10.6% since the currency hit a low of just US68.28 cents in mid-January, which was a price level that the country’s central bank would have been far more comfortable with.

Indeed, members of the RBA have indicated that their preferred level for the Australian dollar is around US65 cents. At that level, our exports would become far more competitive with goods and services provided by other countries, and thus boost the growth of the non-mining sectors of Australia.

The problem is, a number of other countries are also eager to depreciate their own currencies for similar reasons. To do that, many have even cut their cash rates into negative territory, while the RBA itself has held firm on its current rate of 2%.

However, there is a growing chorus of analysts who believe it will not be able to maintain that stance for much longer, including Vimal Gor, head of fixed income for BT Investment Management. According to The Australian Financial Review, Gor believes the RBA will need to cut interest rates by half a percentage point, which would take the cash rate to just 1.5% potentially before the end of the year.

His short-term prediction is for the Australian dollar to rise as high as US80 cents, which would prompt a response from the RBA in the second half of the year. That could push the dollar back to around US71 cents, based on consensus estimates from some analysts, while BlackRock’s Stephen Miller thinks it could fall well below that level, according to The Sydney Morning Herald.

A higher dollar now is good for net importers of goods, including a number of retailers. However, other companies which generate more of their earnings overseas, including Westfield Corp Ltd (ASX: WFD), ResMed Inc. (CHESS) (ASX: RMD) and Cochlear Limited (ASX: COH), will likely benefit in the long-run if the dollar does fall, as most analysts expect will happen.

Foolish takeaway

Betting on currency movements is not without its risks – particularly when it comes to forecasts being made for the near term. However, there are a number of reasons to believe that the dollar will fall in the medium-to-long run, especially if commodity prices do retreat again. And if the dollar doesn’t start to fall on its own accord, we could certainly see the RBA intervene.

Our BEST stock idea for 2016 - FREE!

Our top analysts have recently selected their TOP stock idea for 2016, and with share prices falling, it could be the BEST time to buy! This relatively unknown technology share is growing rapidly and offers a fat, fully franked dividend! Best of all: their top stock idea for 2016 is yours FREE! Just click here, enter your email address and claim your free report - no payment or credit card required!

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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.