It’s been a few topsy turvy trading days for the Aussie dollar recently as the economic world catches up with the US/China trade situation and all eyes stare intently at the RBA as they decide on the next move for Australian interest rates. Last week was a strong week for the AUD in the face of global pressures, but it’s taken a bit of a hit this week despite a relatively positive US/China meeting at the G20.
Since last week’s update, the AUD has lost ground on the USD, GBP, CAD, NZD and SGD while holding steady with the JPY and EUR. That said, today 1 AUD will buy you:
It’s prime time for market volatility at the moment and foreign exchange prices are expected to remain unstable for the short term. If you want to skip the worrying over currency markets and get stuck into planning the more fun parts of your holiday, add Rate Guard to your foreign currency purchase in store and we’ll refund the difference if the exchange rate drops within 14 days of purchase. How good is that!?
The Bears are back in town as the AUD faces challenges from all angles
Since yesterday’s market open the AUD has lost more than 1% in value against the USD, failing to hold onto last week’s positive gains and has also dipped against most major currencies. Some pundits were tipping that a positive outcome at the G20 Summit over the weekend could give a boost to the trade-dependent AUD, but it wasn’t to be.
It could be due to two reasons.
Firstly and most importantly, the market is currently pricing in an 83 percent probability that the RBA will cut interest rates by 25 basis points, up from the 74 percent probability priced by markets before the G20 Summit. On this note, Westpac data reveals that the market doesn’t always get these rate predictions right (who’d have thunk it), missing a number of rate cuts and drops over the years. The RBA likes to keep their cards pretty close to their chest though; I wouldn’t want to play against them in a game of poker that’s for sure!
Secondly, the Caixin-Markit manufacturing purchasing managers’ index (both a mouthful and an important measure of manufacturing strength in China) fell during May after three consecutive months of gains. This drop in manufacturing output has renewed calls in China for the Government to introduce further economic stimulus as the Trade War continues to weigh heavily on exports and domestic sales.
If the RBA cuts the cash rate today and offers a more upbeat or even neutral statement on monetary policy and economic health, the AUD is likely to be given a little bit of a boost and could even claw back last week’s gains pretty quickly. On the flipside, if the RBA were to cut the cash rate and deliver a more negative outlook of the economic landscape, leaving the door open for further interest rate cuts and the need for stimulus, the AUD could easily take another hit.
Luckily for Aussie travellers, many economic experts are expecting more substantial US rate cuts this year than in Australia, which could be helpful to the short-term performance of the AUD. The AUD Bulls will be hoping the Federal Reserve meeting this month will give a clearer expectation of interest rate cuts in the US and could be the driver of an improved AUD/USD exchange in the short-term.
Bears and Bulls – what does it all mean?
It’s a common expression used in trading and economic environments, but what exactly does Bear and Bull mean?
Knowing whether the current market environment is Bullish or Bearish is very important in order to avoid trading or purchasing against the overall trend, and for Aussie travellers, it can be the difference between having to tighten the belt a bit overseas or having a bit more of a splurge.
The best way to learn how to identify Bull and Bear markets is through examples.
A Bull market is when the buyers are optimistic about the rise in the prices of shares or currency. It is the time when the share prices or a currency is rising because of positivity in the macroeconomic environment and a range of other factors. Investors or traders who are optimistic and buy shares or currency at this time are known as Bulls. Just remember that when a bull is angry and attacks, it uses its horns in an upward goring manner, that’s why a Bull market is one that is going up.
A Bear market is the exact opposite of a Bull market, characterised by falling prices and typically shrouded in pessimism by traders and currency purchasers. On the contrary, a Bear market is named for the way a bear swipes downward during an attack, being a graphic metaphor for market activity under these conditions.
There you have it; Bull and Bear markets – violent and informative.
GBP heads south as weak manufacturing data piles on the pressure
Thankfully, things have been relatively quiet in the UK recently. We’ve all needed some time to catch our breath with everything that’s going on around the world at the moment.
The GBP has struggled in the last few days against the major currencies, the USD, especially as domestic data, continues to point out the negative effect Brexit is having on the broader economic environment.
The initial fall in the GBP this week was triggered by the release of June manufacturing data, with the report declaring the UK’s manufacturing sector “continued to feel the reverberations of the unwinding of earlier pre-Brexit stockpiling activity.” The UK manufacturing index fell for the third consecutive month, reaching its lowest level since February 2013.
On the Brexit front, another amendment designed to block the incoming British Prime Minister (whoever that may be) from removing the UK out of the Eurozone without a deal was rejected. This continued uncertainty in terms of a Deal or No-Deal Brexit doesn’t look like it’s disappearing any time soon and its weight is being fully felt by the GBP. Will the UK Parliament be able to agree on anything moving forward?
When the Central Bank meet again this month, it will be interesting to get an idea of where they stand on interest rates if manufacturing data, labour market figures and the spectre of a No-Deal Brexit are still pointing to the negative. It could offset any interest rate cuts made by our own RBA and could help keep AUD/GBP performance in positive territory. For the time being though it’s not looking rosy for the GBP in the short-term against the USD, AUD, EUR, NZD and other major currencies.
US/China press pause on Trade War, but it’s a long road ahead
It’s been a massive weekend in Japan with world leaders holding speed dating style meetings with their contemporaries in the hopes of stabilising global trade, international relations and the environmental effects of climate change. All eyes were on the US and China though as the Trade War finally had a chance to be pulled back for good. Instead, President Trump and Xi Jinping appear to have pressed the pause button, for now, putting some wind behind stock market sails but failing to impress on the whole.
It didn’t stop the USD from strengthening overnight though, and while the US and China agreed to restart negotiations, there is still strong disagreement between the US and Chinese governments about technology companies, trade, intellectual property rights and Chinese business policy.
Further complicating things for the Greenback is the stance of the Federal Reserve on interest rates. The Federal Reserve raised its interest rates on four occasions in 2019, taking its levels higher than most other major Central Banks, angering Donald Trump and making the US dollar one of the biggest drawcards for investors in currency markets.
Yesterday though, Richard Clarida, Vice Chairman of the Federal Reserve, hinted at a rate cut stating; “we will certainly act as appropriate to put in place policies that sustain the economic expansion, and the strong labour market and price stability”.
Basically, the US/China Trade War is a little better (for now), and markets have reacted positively to the truce with the stock market rallying, bond yields rising and the US dollar looking stronger in the short-term, but some BIG questions still remain. Until further details around the US/China negotiations come out and the Federal Reserve meets this month, the USD is probably stuck in a bit of a holding pattern and unlikely to get too much of a boost in the short term. This is good news for the AUD and Aussie travellers as we have a bit of uncertainty of our own to deal with.
As usual, stay up to date and save yourself some money in the process!
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