redback report, week ended 1/10/10, page-9

Hiya unbreakable,

'Tis a strange conflict of fundamental info surrounding interest rate decisions.

At the mo, with "smart Money" expecting a interest rate rise, the market has already pushed the AUDUSD up , as a higher interest rate on the AUD versus USD is seen by large financial players as a good reason to hold AUD for the interest rate (rent) return alone, and is the fundamentals of a carry trade...

IF there is an interest rate decision to the upside then this "means" the RBA/Treasury are worried the economy is heating up too much... the rais in interest rates is palced there to make it more difficult or expensive for businesses etc to raise loans, and as such they are not able to expand as quickly as they might with lower interest rates... so a higher interest rate is actually bad for those businesses in Australia that wither have debt or want more debt.

Coupled with this is something JamesDoran has been banging on about for a while now, higher interest rates and a higher AUD make Foreign investment in Australian investment vehicles (eg the stock market) less attractive as the bang for their local currency is affected negatively by OUR local currencies strength.

So.. although I am far from fully understanding the underlying fundamentals, in the above there is a kinda explanation as to why a rased interest rate can indeed have a negative affect on the stock mareket.

;)