14th November 2018
The AUD rose slightly from 0.7164 to 0.7224 against the USD overnight, also making gains against the CAD and JPY.
This comes after a strong performance last week that saw the AUD/USD trade above 0.7300 for a few days. The improved performance came off the back of the US midterm election results, a rise in commodity prices and a more optimistic outlook from the Reserve Bank of Australia (RBA) about the Aussie economy. However, since that has settled the AUD has drifted down slightly.
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Australia’s September quarter Wage Price Index (WPI) was released this morning, coming in at 0.6% for the quarter. This brings the full year increase to 2.3%. Both of these figures were expected, so the market (aka the AUD) hasn’t seen a great deal of movement as a result.
This rise in wages comes from a 2.1% rise in private sector wages, and a 2.5% increase in public sector wages from the beginning of the year to September. This is the highest growth rate since the September quarter in 2015.
ABC Chief Economist Bruce Hockman reiterated, "There was a higher rate of wage growth recorded across the majority of industries in comparison to this time last year, reflecting the influence of improved labour market conditions.”
So why does this affect exchange rates?
Well, WPI data feeds into other economic indicators like household spending, general economic growth, the labour market and, most importantly, the outlook for inflation and Australian interest rates. If inflation is higher as a result of increased wages, it can put upward pressure on interest rates leading to more demand for the AUD. Increased demand = increased value = more spending money for travellers overseas.
Australia has also seen consumer sentiment rise 2.8% in November, up to 104.3 from 101.5 in October.
Consumer sentiment measures how people are feeling about the economy, as well a perception of their wealth. In other words, an increase is a good thing. Whilst these 104.3 is not particularly strong, it is still over the 100 threshold and is continuing the upward projection that has been seen over the past year.
Global events impacting the AUD
Earlier this week, a South China Morning Post news article indicated Chinese Vice Premier Liu He is expected to visit the US to continue talks aimed at easing ongoing trade tensions. This comes ahead of the scheduled summit between Chinese President, Xi Jinping and President Trump at the end of the month.
This news has helped support the AUD this week, despite still falling from the 0.7300 levels of last week.
The proof will be in the pudding, as it seems there is still plenty of work to do with regard to China and the US finding common ground and reaching a mutually beneficial trade agreement.
This all comes at a time where we continue to see evidence of a slowing Chinese economy, as their social financing figures show the slowest pace of growth since 2005. As the Aussie dollar is heavily impacted by what happens to its Chinese counterpart, any type of decline in the Chinese economy is not great news.
The UK & Europe
Both the pound and the euro were boosted by news the the UK and EU have struck a Brexit deal after months of negotiations. It’s important to keep in mind that this ‘deal’ is officials from both sides agreeing on a draft text of the Brexit negotiations.
British Prime Minister Theresa May still has to pass this through Parliament and the Cabinet, which could prove problematic.
Whilst the pound did see a surge, should the deal not gain the necessary support in Parliamentary negotiations, the GBP could once again fall against the AUD. Whilst this wouldn’t be great for the UK, it is good for Aussie travellers wanting to head to the motherland with a bit of extra spending money.
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