The Aussie dollar is trading higher today against the USD, EUR, JPY, GBP, NZD, SGD and CAD than earlier this week, as it shows resilience against the major currencies despite the RBA cutting interest rates to a new record low and some less than impressive domestic data.
There was a similar response with the AUD climbing after the last interest rate cut before dipping back to just above where it started. With Central Banks around the world seemingly getting closer to dropping interest rates themselves, it will be interesting to see how long the AUD can keep moving upwards, Aussie travellers sure would be happy with some consecutive good news stories.
Today, 1 AUD will buy you:
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Two steps forward, one step back for the AUD after rate cut
For the second month in a row the Aussie dollar did something after an interest rate cut that goes against the notion that lower interest rates mean a weaker dollar; it rose. On Tuesday the RBA made the first back-to-back rate cut since 2012, taking Australia’s official cash interest rate to 1.00%. To put that into some historical context, 30 years ago the RBA decided to keep the interest rate on hold at a record 17.00%.
Despite Australia’s interest rate dropping to the sixth lowest in the world, the AUD was the top performing G10 currency in foreign exchange trading this week. You’d normally expect lower rates to push the AUD down but the bounce in AUD value straight after the decision shows that the move was well and truly built into the price and that other macroeconomic factors are helping the AUD hold its value.
The slightly more optimistic tone of the RBA Governor was better for market confidence than June, saying the cut was to “support employment growth” and generate “greater confidence” in the Australian economy which is growing “on trend” with their expectations. Household spending and the unemployment rate are the big ticket items for the RBA moving forward and unless the former kicks into gear and the latter drops back to under 5% economists expect rates to drop once more this year. The RBA will be hoping the Government’s tax legislation has the desired effect in boosting spending in the economy, although the results won’t be known for a few months.
Despite a bit of spike when the rate cut was announced, slightly softer than expected domestic retail data and nervousness surrounding the Trade War truce brought the AUD back to reality yesterday, but the Aussie is still poised to end the week a touch higher than it started.
The relative strength of the Australian Dollar post RBA cuts show that markets are ready for reductions to the cash rate and a further cut this year may not cause too much downward pressure, especially as the Federal Reserve is looking increasingly likely to drop interest rates in the near future themselves.
No good news for GBP as Brexit and leadership uncertainty continues
It’s been another week of more of the same in the UK, with Conservative leadership contenders Boris Johnson and Jeremy Hunt doing the rounds to convince their peers of their Brexiting credentials. While both men have said they’d prefer not to have a No-Deal Brexit, they have both left the door ajar for that possibility if a satisfactory deal can’t be reached before the October 31st deadline.
There is also the growing possibility that the Bank of England will look to lower interest rates in the face of increasing US/China and UK/Euro trade uncertainty and the lowest manufacturing data in a decade.
As a result, the GBP/USD, GBP/NZD and GBP/AUD all performed weakly for the Pound and with no major data releases on the horizon, the currency will remain at the mercy of political and Brexit developments in the UK for the short term.
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USD trading under pressure as Federal Reserve contemplates rate cut
It was slow going for the USD overnight with US equity and bond markets closed due to the US Independence Day holiday.
The Trump-Xi trade war truce from last weekend’s G20 summit has done little to allay the fears of markets and traders around the world. Weak manufacturing output and lower than expected job creation data released this week also served to keep the USD under pressure and the upcoming speech of Federal Reserve Chairman Powell is likely to be key for AUD/USD in the short term.
If he indicates that a cut in July is unlikely, the Aussie dollar might be brought back from its recent gains. But if Powell gives the indication of 1 or even 2 rate cuts by the end of the year, the AUD/USD may be able to continue its recent positive run.
A number of US banks have released internal research pointing to the fact that the US dollar may be overvalued by 10-13% at the moment. This could lead to further pressure being added to the Federal Reserve’s plate with President Trump now explicitly calling for a weaker US dollar in response to the moves of other Central Banks. The following tweet sums it up pretty well:
“China and Europe playing big currency manipulation game and pumping money into their system in order to compete with USA. We should MATCH, or continue being the dummies who sit back and politely watch as other countries continue to play their games - as they have for many years!”
He doesn’t miss, that’s for sure.
The ongoing surge in iron ore prices has been a huge support for the performance of the AUD/USD with resources exports producing record trade surpluses and China’s increased demand for the ore offsetting the RBA’s decision to drop interest rates again.
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