8th November 2018
It’s a good news story for the AUD today, as it rose against the USD overnight off the back of midterm election results and a positive outlook from the Reserve Bank of Australia (RBA).
The Aussie dollar is currently riding a six-week high against the USD. After beginning the month around 0.7070 against the USD, we are now up around the 0.7275 mark. From a traveller’s perspective, if you were exchanging $2000AUD you would be heading to the States with an extra $41 today, compared to if you were exchanging 8 days ago. In other words, planning your foreign currency purchase could cover you for a few days lunch on your classic Route 66 road trip - yeehaw.
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This six-week high comes after the markets digested the US midterm election results, which saw the Democrats win a majority in the House of Representatives and the Republicans keep their small majority in the Senate.
The markets expected this result; however, the now divided Congress may result in a weaker USD, as it makes it harder for President Trump to pass any further fiscal stimulus in the lead up to the 2020 elections.
As a result, any increases in inflation that might have eventuated off the back of any Trump-proposed stimulus would be limited. This could potentially slow the speed of interest rate hikes over the next couple of years. Despite this, the market is predicting an 80% chance* that there will be another interest rate hike for the US in December.
Regardless of what happens, it’s likely to be quite entertaining watching Trump and his tweets battle the Democrats over the next few years.
So, why has this made the Aussie dollar stronger?
The AUD is a risky currency, and investors choose to buy it during a risk-on environment. In other words, there is more demand for the Aussie dollar when investors are more confident in the general economy. Once midterm elections were over, the air of uncertainty on the market lifted, and as a result investor confidence in the economy was boosted.
In addition to this, investors began to sell off their USD bonds due to concern about Trump’s upcoming struggles passing fiscal policy through Congress. Less demand for the USD makes it weaker.
The icing on the cake is renewed confidence in the Australian economy, after RBA governor Philip Lowe said it is in good health thanks to a supportive global environment and a recovery in commodity prices.
This strong sentiment has helped the AUD remain resilient against the pound, despite increased demand from investors for the GBP amid speculation that the Brexit deal may be coming to fruition.
If you are travelling soon, we recommend adding Rate Guard to your transaction in any Travel Money Oz store. Should the rate change within 14 days of purchase^, we will guarantee to refund you the different. Who knows, it might leave you with an extra $41 in your travel kitty.
Definitions for those of us playing at home
This is a subjective market term that describes how investors are behaving and feeling in the market. Investors are either ‘seeking risk’ or ‘risk averse’. If there is a good overall economic outlook, there will be a positive risk sentiment as investors seek risk as they feel more confident to buy ‘risky’ assets and sell of ‘safer’ investments. The Aussie dollar is generally considered to be a risky investment. So, when there is a risk averse attitude investors are less likely to be purchasing the AUD.
RBA - Reserve Bank of Australia
The bank conducts the nation’s monetary policy, as well as issues its currency.
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All rates quoted are market rate, which is not available to the general public.
*Information regarding rate hike predictions is sourced from Westpac in their Finance:AM podcast, 8 November 2018.
^Terms and conditions apply to Rate Guard. See https://www.travelmoneyoz.com/rate-guard for more information.