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AUD news: AUD recovers after flash crash in Japanese markets

8th January 2019
Overnight the AUD increased in value against the USD and Japanese Yen (JPY), whilst decreasing slightly against the Great British Pound (GBP) and Euro (EUR). 
 
This comes off the back of the craziness we saw at the end of 2018. 
 
What craziness, you ask? Well, on the 3rd of January, while most people were emerging from their festive season food coma, the JPY experienced what is known as a ‘flash crash’. A flash crash occurs when a particular market, or several markets, experience a very sudden and volatile fall in a short period of time. This is often caused by a sudden disappearance of liquidity in the market (aka a rapid sell-off of assets resulting in dramatic declines). Whilst rare, they do occur from time to time. The New Zealand Dollar experienced a flash crash in August 2015, and the GBP in October 2016. 
 
The Yen’s flash crash saw its value soar to a point where the AUD went from buying 75.20 to 72.30 in one day. To put this into perspective, if you were exchanging $2000AUD, this fluctuation is a difference of about 5800 yen, or a night’s accommodation in a 3-star hotel in Tokyo. In other words, this was a HUGE move in foreign exchange markets. 
 
This crash rippled through markets, seeing the value of the AUD against the USD reach a low of 0.6730. Ouch. The Aussie dollar has since recovered and is now trading at 0.6947 USD, and 74.20 JPY. 
 
Whilst insane movements like these are rare, they are quite often very unexpected. Protect yourself from all market movements with Rate Guard. Simply add it to your purchase in-store (it’s free) and if the exchange rate improves within 14 days we will refund you the difference*. 
 
 
Craziness aside, a number of the themes we spoke about last year continue to affect markets in 2018; in particular, the US/China trade talks and the pace of interest rate rises in the USA. We also have the US government shutdown entering into its third week. In other words, President Trump is fighting many battles both internationally and domestically.
 
The US/China trade talks resumed overnight after the holiday break. Both sides might have more reason to reach some sort of agreement given some of the less than encouraging news coming out of both countries of late. As always, we’ll continue to keep an eye on this and report on anything substantial that comes as a result of the trade talks and their effect on the AUD.
 
The US Government has been partially shut down since December 22nd. Why you ask? Well, Trump is requesting a mere US$5.6billion for his long-promised US/Mexico border wall. The spending legislation needed to be passed by December 21st to avoid a government shutdown. So far, the Democrats have rejected his request. Neither side is willing to back down at this stage. 
 
Generally, when there is potential for a government shutdown, there is a general risk-off sentiment in the market. This may have contributed to some of the weakness in the AUD towards the end of 2018 as it is considered a more risky currency. With this in mind, if the shutdown is resolved there might be an increase in risk sentiment, which could be positive for the AUD. 
 
The other major influence on markets at the moment is the potential changes to the number and pace of US interest rate hikes. Last week, Federal Reserve Chair Jerome Powell confirmed that the Fed was listening to markets, stating that current low US inflation allows the Fed to be patient and see what economic data looks like in the next few months. It will be interesting to see how long this patience lasts. Any pause should be positive for the AUD against the USD. Higher US interest rates mean the USD is more appealing than the AUD for investors, thus putting downward pressure on the value of the AUD against the USD.  
 
UK Prime Minister, Theresa May, has finally announced a date for British MPs to vote on her Brexit deal after postponing the original vote, scheduled for the 11th of December 2018. The new vote will take place next Tuesday 15 January 2019 (Wednesday 16th Australian time). 
 
Should there be a majority vote against the proposed deal, the prospects of leaving with a ‘no-deal’ will become much higher. In preparation for this instance, over 200 MPs have already signed a letter urging May to rule out a no-deal all together. 
 
On the flip side, many conservative MPs are actively calling for Britain to leave without a deal. They argue that May’s current deal is not reflective of the Brexit that citizens originally voted for in the referendum. Leaving without a deal means the UK would automatically fall back on the World Trade Organisation rules. 
 
We will just have to see what will happen with next week's vote, as the decision will have a major impact on how Brexit continues to unfold.  
 
 
Definitions for those of us playing at home:
 
Risk Sentiment (Risk-averse mood)
This refers to changes in investment activity based on the level of risk tolerance in the market. If the risk is perceived to be low (risk-on) the theory states that investors are more willing to engage in higher-risk investments. Likewise, when the risk is perceived to be high (risk-off), investors will seek lower-risk investments.
 
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All rates are quoted from the Travel Money Oz website, and are valid as of 07 January 2019.
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