Scenario - US interest rates shoot up, what impact does this have on AU interest?

Discussion in 'Property Market Economics' started by jerrybee, 27th May, 2015.

  1. jerrybee

    jerrybee Member

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    Or is there no correlation at all? Seeing as this is very likely in the medium and maybe even the short term I'd like to understand what risks need to be planned for.
     
  2. greedy2000

    greedy2000 Member

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    - Aussie Dollar would drop

    - Imports would become more expensive, inflation rate would rise as a result.

    - This would be potentially better for our economy as our terms of trade would increase.

    - Over time cause our rates to raise.
     
  3. BayView

    BayView Member

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    I can't see the USA rates going up much anytime soon; nothing really has improved over there in the recent past?

    Their health system is stuffed, they're being over-run by illegals every day - adding to the poverty and welfare, their manufacturing is not increasing in any real way (other than maybe war items), their economy debt is astronomical and war debt is astronomical...

    It was in a terrible state when we were there, and nothing has happened since that's good...

    Just a more "advanced" version of Aus, actually.
     
  4. keithj

    keithj Member

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    Yellen agrees with you...

    Where are fixed rates funded from ? If O/S rates start to rise, then expect fixed rates here to rise too. And probably well before the variable rate rises.
     
  5. JDP1

    JDP1 Member

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    Strong correlation between aud: usd.
    If the fed raises rates, assuming rba keeps.steady, the aud will drop significantly.
    Converse is also ttrue.
    Guessing game as to when such and such might happen. I think sportsbet.com is taking punts on these things...
    In my overly not so humble opinion, the US fed will move upward before the rba.
     
  6. willair

    willair xx

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    The problem is most think the way the rates span out from the US Federal Reserve Bank are random it does not work that way,some directors wanting increasing from between 25 points to the above half percent rates,i don't think one needs too much mental clarity to think the opposite..
    https://www.youtube.com/watch?v=bzDmnKxmD-E
     
  7. Biz

    Biz $17 DOLLAS YO!

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    Says who?

    Like I said in the aussie interest rates thread a while back. You won't see interest rates at 8% for as long as I have a hole in my ar$e. You won't see US interest rates shoot up for as long as I have a hole in my ar$e either.
     
  8. Deltaberry

    Deltaberry Member

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    Australian inflation picks up and interest rates might not fall as quickly or might even rise.
     
  9. KangaBanga

    KangaBanga Member

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    if US rates rise, there will be a flow of capital back to the states much like a few months ago strengthening the dollar and weakening most other currencies.

    Other central banks will have to follow suit or lose out as the strengthening USD will mean US has better terms of trade.

    Yellen will not be attending Jackson Hole this year. Maybe she doesn't want to face all the people wanting low rates? heh...
     
  10. jerrybee

    jerrybee Member

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    This is what I'm trying to get to the bottom of. How it's all linked.

    1) So USD interest goes up.
    2) USD strengthens.
    3) Other currencies weaken.
    4) Other governments boost their interest rates to better compete.

    Is that how it works, in a nutshell? Or have I missed something?
     
  11. JDP1

    JDP1 Member

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    Point 2- generally yes, assuming there is no 'un-natural' US Fed programs such as QE programs which increase supply of the greenback and thus dilutes its value.

    Point 3- not applicable to all currencies but a lot , yes, as the greenback is still seen as a bellweather, safe haven, reserve currency [ rightly or wrongly], mainly those that are liquid, highly traded or those pegged to the USD.

    Point 4- not always the case. Depends on local economic factors such as local interest rates, inflation, consumer confidence, trade data, inventories, and many many other micro-economic factors. The local reserve banks will be looking to raise, but only if a lot of the micro-economic stuff is looking healthy.
     
  12. MTR

    MTR Bling Bling

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    Not sure.. This stuff does my head in

    All I can say is the au$ has dropped significantly over tha last 12 months about 25%, while US economy is improving. When interest rates drop in oz the Au$ drops.
     
  13. Ausprop

    Ausprop Member

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    I think the AUD will be hit hard and then our living standards will drop dramatically as the cost of virtually everything will sky rocket. The RBA will have the flexibility then to keep rates as is or even raise them without fear of the effect on the AUD, also taking the heat out of the Sydney property market. Will probably feel a bit like 1995... property dead as a dodo, not much happening and if you want to buy a new car you'll need to put away a couple of years salary! The economy will then drift around a bit waiting for the next big bubble
     
  14. KangaBanga

    KangaBanga Member

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    1995 is a good historical reference and history often tends to repeat itself. Just a few months ago, petrol was at $1/L

    It has taken half a year of lag time since commodities and oil tanked late last year for the effect of a sharp drop in business capex to show in the ABS figures. Figures for the next quarter should be pretty dismal if not worse.

    China's economy is also in a lot of trouble despite the official 7% GDP growth figures (PMI shows a trend of manufacturing contraction in China and energy demand growth has been flat) They have been easing quite a few times this year already despite runaway stock and property prices.

    RBA may not be able to raise rates even if the FED raises as the economy here may be too weak despite inflation from the dropping AUD.
     
  15. ej89

    ej89 Member

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    I agree.. But does this mean the hole gets stitched up if we get to 8% haha
     
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  16. JDP1

    JDP1 Member

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    I agree on both points. Although I wouldnt say the Chinese economy is in real trouble just yet but surely wobbly. It's more that monetary policy in China has favoured equity prices especially their stock market. This is causing overvalued shares. I think a lot of share investors there willvtake money outta shares and look elsewhere that's stable and consistent long term growth, and if the A$ is low, then aust real estate becomes an attractive proposition.
    And yea, even if US raises, rba won't raise here; economy is just too weak.
     
  17. unloadmymind

    unloadmymind Member

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    Remember our local deposits are very much insufficient to fund the loan books of our banks.

    Our banks borrow a large amount of money from the overseas wholesale markets.

    If rates go up overseas, our banks will have to drop deposit rates by a bigger amount to compensate for the higher cost of funding.

    But there's a limit to this due to competition for scarce deposits and a declining savings rate.

    So even if the RBA keeps cutting target cash rates while the banks' overseas funding costs are increasing, they will only be able to "pass on" so much of the rate cuts.

    The RBA does NOT fund our banks' loan books except for temporary cashflow situations.
     
  18. Deltaberry

    Deltaberry Member

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    Yep selling a couple to reduce LVR to below 15%. Love property booms. Should hold a couple debt free and have cash in offset to pounce on anything of value if the doom scenario you talk about materialises - bond, shares, properties etc.

    No point selling too much. Once you pay 1.5% agent fees, 22.5% CGT and 5.5% stamp duty to buy back in, marke has to crash 30% to breakeven. Any less you're better holding debt free at the very least.
     
  19. MTR

    MTR Bling Bling

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    I think this is pretty much spot on

    We measure the value of the Aussie dollar in terms of its relationship to the U.S. dollar. If the Fed raises interest rates, this will put upward pressure on the U.S. dollar. If the U.S. dollar strengthens, the Australian dollar will get weaker, all else being equal.

    This is a win for the RBA. If the Fed raises rates, the RBA gets what they want without having to lower interest rates any further. This would be a massive relief for our central bankers, since they already need help from APRA.

    However, if the Fed doesn?t raise rates, and the Aussie dollar doesn?t get weaker, the RBA may need to lower interest rates again. And we all know how the Aussie real estate market has been responding to the RBA?s recent moves.

    If we take this a step further, any prolonged weakness in the U.S. dollar puts more pressure on the RBA to keep lowering rates. If we see future Aussie rate reductions, this could continue to produce unintended consequences in the real estate market. Once APRA has run out of tricks in its bag, then it?s over to Joe Hockey to work his magic on the tax code.
     
  20. willair

    willair xx

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    http://en.wikipedia.org/wiki/Dodd–Frank_Wall_Street_Reform_and_Consumer_Protection_Act

    The problem will only start to surface over the next 6-12 months,the interest rate on treasury bonds is around 2.2%, what happens when they go above 4.5%,and the short term federal funds rates go above 3% from zero?? sounds like a lot of the bonds that have been sold may experience a substantial loss if they try to cash them in before maturity,or inflation kicks in and the black swan has landed in the bond and equity markets..imho..