On Wednesday and Thursday night, there was some major moves in the US Stock Market, with the Dow Jones falling by more than 800 points. This was The Dow’s third biggest points fall ever, however, only the 16th biggest percentage fall.
This fall led to a pretty big ‘risk-off’ sentiment (people seeking investments with a lower perceived risk). Surprisingly though, the AUD/USD remained resilient and did not witness any massive movements.
This was partly due to underwhelming expectations for US inflation, which put downward pressure on the USD against most major currencies.
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President Trump has claimed that the Fed has “gone crazy”... some may say this is the pot calling the kettle black, but Trump did stop short of saying he would sack Fed Chair Jerome Powell. Trump consistently tweets about the stock market making new highs, so seeing its biggest fall since February has seen him quick to point blame at the Fed and their “out of control” behaviour.
So, what does this mean for currency markets?
Usually the AUD comes under pressure when risk sentiments rise. However, as people rotate out of stocks and into US Treasuries, it has reduced the return on these assets and the gap between similar Australian assets, making the Aussie assets more appealing.
Next week the US will release its twice yearly currency report. It sounds like the US Treasury Department will state that China isn’t manipulating their currency. If this is the case, it would help stop an escalation of the ongoing US/China trade war.
Trump has publicly stated that he believes China is a currency manipulator, so he appears to be at odds with the US Treasury Department here. If that’s the case he will be fighting with both the Fed and the US Treasury. Strap yourselves in folks… we’re in for a ‘UGE week.
On a lighter note (pun definitely intended), Australia’s new $50 note has been revealed! The whizz bang new note boasts upgraded security and raised bumps to assist people with low vision. We expect to see the new $50 note hitting streets and your back pockets next week.
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Definitions for those of us playing at home:
Dow Jones Industrial Average (aka ‘the Dow’)
The Dow is the most famous and widely used index for the stock market. The Dow’s price is weighted and tracks how 30 of the largest, most influential public companies (read big dogs of the stock market in America) have traded during a standard trading session. Think companies like IBM, Macca’s and Microsoft.
Risk-Off v Risk-On Theory
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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