Why Interest Rates are Headed Down Again


The clock might be ticking for the Aussie dollar. The cash rate is going down. That’s as far as Bill Evans is concerned. He’s Westpac’s chief economist.

His tip: The Reserve Bank will cut twice this year. You could say he’s late to the party.

My colleague, Shae Russell, has been saying the same thing for two years.

For me, it’s slightly strange.

I was at a conference in 2015. A presenter showed a chart that ‘speculated’ the short-term interest rate was going to 1%. Odds look like it will play out that way.

We’ll see. There’s no guarantee here. But if the Aussie dollar really cracks, it could turbocharge the return for miners and businesses earning US dollars…

A lower cash rate will also send retirees back to the share market hunting for dividends.

That could send in a lot of buying pressure to the market. We might just see all-time highs on the ASX this year after all.

Last year, I thought that high commodity prices would prop up the Aussie dollar around where it is now.

That appears to have happened. But there’s no doubt the case for it is weakening.

For example, a major prop for Aussie exports, and hence the Aussie dollar, is the coal market. That’s coming under pressure on two fronts.

One is that China is currently preventing Australian coal from landing at some of her key ports.

This is apparently a political message around Australia banning Chinese firm Huawei from its 5G network.

The second is more systematic. The world is simply turning away from fossil fuels. Coal is at the top of the list.

Even Glencore — a major commodity trader — has announced it’s going to cap the amount of coal it produces in any given year.

Coal is Australia’s top export.

This is not to say coal prices will go down anytime soon. But when does the market start discounting heavily an industry with a dying future?

Then we have the curious case of Australian LNG out of Queensland.

A noted research house says Queensland simply can’t produce enough gas over the medium term to supply both the domestic market and the six export trains around Gladstone. That might take a bit of wind out of the Aussie dollar as well.

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You could keep an eye on Cooper Energy [ASX:COE]. Its ‘Sole’ project in offshore Victoria is very close to completion and it has uncontracted gas up for grabs.

Not only that, but it has a couple of exploration targets up ahead. It’s in a good position to supply what looks to be a tight market for quite some time.

That’s not a recommendation, by the way. Just an idea for your own study and further research. It’s already had a bit of a run recently.

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Do yourself a favour. Don’t get suckered into the idea that Australia is on the brink of recession.  

There’s a lot of good news out there. In fact, as far as the job market is concerned, things are ticking over rather nicely indeed.

The Australian Financial Review reports this morning that engineering contractor John Holland is hiring 165 people a month on average.

The infrastructure spending in New South Wales is keep them more than occupied. This is partly why Australia’s January job figures surprised to the upside.

Victoria and Queensland are investing heavily at the moment as well.

This would suggest a major real estate or share market downturn is unlikely. And, as above, if the RBA cuts rates, shares and property will benefit as their current yields become more attractive.

This is a very reasonable backdrop to go hunting for stock speculations.

You can sidestep the difficulties in pockets of the Australian economy — retail, mortgage brokers, credit growth — and go hunting elsewhere.

In fact, I spent a lot of time last year recommending stocks that don’t even operate most of their business in Australia.

The best news is you can buy them right here on the ASX. You get easy access, Australian governance — but the potential of US or global market share.

That’s a win-win.

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Callum Newman Signature

Callum Newman,
Editor, Profit Watch