TGIF friends, what a huge week it has been for global markets. As we ease into Friday, knock-off drinks in sight, let's take a look at the week that was for our humble Aussie dollar. As it stands, the Aussie dollar has improved since the beginning of the week against most major currencies, and 1AUD will currently get you:
The Euro is currently at a two week high, so if you're skipping out on Australia's winter in favour of a European summer, now might be the time to buy. Avoid missing out on hot rates by signing up for Rate Alerts, and we'll let you know when the AUD hits your preferred rate.
Unrest in Hong Kong continued into its 10th week, with many pro-democracy protests happening throughout the country. These relatively peaceful protests have been met with increasing levels of hostility. On Thursday, China issued a threat to protestors claiming it has "enough solutions and enough power to swiftly quell unrest" should the situation become uncontrollable.
Meanwhile, President Trump has had his say by, of course, tweeting that protestors and Chinese leader Xi Jinping should meet to reach a "happy and enlightened ending to the Hong Kong problem".
All tweets aside, while these protests haven't had a direct impact on the value of the AUD, they have contributed to growing global concerns that are, in turn, leaving a bad taste in investors' mouths. In other words, investors are relatively risk-averse at the moment due to their lack of confidence in the global economy. This affects the Aussie Dollar, a risk-on currency that thrives when markets are willing to make riskier investments.
On Wednesday the US bond yield curve inverted (see definition below), a movement that has foreshadowed the last seven recessions. As you can understand, markets were shaken and recorded the worst day since December 2018 wiping 3% from Wall Street.
This inversion, coupled with data from Germany and China that showed their economies are weakening as a result of the trade war, lead to further angst in global traders. When markets opened on Thursday the Australian Stock Exchange (ASX) lost $60billion before closing 2.85% lower at the end of business. 94% of all listed companies recorded a loss. Ouch. Despite this, the ASX is still up 13.5% year to date.
Speaking of the US/China trade war, China's State Council Tariff Committee have announced they will take counteractive measures should the US continue with their current plans to slap another round of 10% tariffs on USD 300billion worth of Chinese imports. Another day, another tariff.
The Australian employment figures came out on Thursday, showing the creation of 41,000 jobs in July. Great news, right? Well, kinda. Despite the increase in jobs, the unemployment rate remained at 5.2%.
This was good news in one sense, as markets were predicting an increase to 5.3% and the unexpected result gave the Aussie Dollar a well-needed little boost against the USD.
The reason it remained at 5.2% despite the increase in jobs comes down to our growing population and participation rate. Usually the creation of that many jobs is cause for a substantial decline in the unemployment rate; however, currently, there is a higher proportion of people working or looking for work (the participation rate).
All things considered, this isn't great news for the long-term value of the Aussie Dollar and the pay-rise you were thinking about asking for. The fact that unemployment hasn't improved is another reason for the Reserve Bank of Australia to cut interest rates in their September meeting. The market has now all but priced in two cuts soon, bringing the official interest rate to an all-time low of 0.50%. The more interest rates are cut, the worse it is for the AUD as investors take their money elsewhere seeking a higher return, thus decreasing demand for the Aussie Dollar and putting downward pressure on its value.
Furthermore, economists do not expect any robust wage growth until the unemployment rate is more in line with the RBA's target of 4.5%. Wage growth is good (obviously) as it means people have more money to spend, thus helping to jumpstart our slowing economy. The current unemployment rate coupled with markets current state is not conducive to wage growth, so perhaps hold off on asking your boss for that pay rise. Or don't. You deserve it, ask anyway. We miss every chance we don't take, right?
In other kinda-bad but kinda-good news, RBA deputy governor Guy Debelle warned on Thursday that the global economy faces the "risk of a self-fulfilling downturn". Business anxiety being fed by the US/China trade war is the main reason for this. While it's certainly not great, Debelle also mentioned that Australia could dodge the worst of the downturn because we aren't involved as heavily in the global tech supply chain where the trade war has the most significant effect. I dunno, a self-fulfilling downturn still seems pretty ominous, but he's the expert so ¯\_(ツ)_/¯.
Labour leader Jeremy Corbyn has put out a call to other opposition parties and rebel conservative MP's to join forces to create a caretaker government, call a general election and secure an extension to Article 50. He is doing this in the hopes of extending the Brexit deadline (AGAIN!!) and preventing the UK from crashing out of the EU with no deal on October 31.
From an economist point of view, we probably don't want the UK to leave the EU without a deal as it could have pretty profound ripple effects throughout the economy. Sure it might boost the value of the AUD against the GBP in the short term (yay cheap Yorkshire puddings!), the long term effects would be far less delicious.
From a writer that's been covering Brexit for the last two years/ general member of society, I want this to be over and done with. Let's shove Brexit at the back of the wardrobe, cover it with a few coats and pretend it never happened so we can go back to our normal lives. Please?
Anyhow, as you can see, it's been a big week for global markets and the Aussie Dollar. With no end in sight for the HK protests, trade war and Brexit, I have no doubt next week will be just as... exhilarating.
Definitions for those of us playing at home
Bond yield curve
A yield curve graphs the difference between interest rates on long-term and short-term investments. A normal curve shows long-term investments paying high rates of interest. An inverted curve means the opposite, with short-term bonds paying higher interest than long-term ones. The curve itself is considered a reasonably accurate measure of economic sentiment in the market. It is a leading economic indicator, with the previous success of predicting the economic future.
Risk-on v Risk-off 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. The Aussie dollar is considered to be a higher-risk investment, so it's value will generally increase during risk-on moods when risk appetite is high.
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