On Monday, I was chatting to a friend, asking if he thought the Aussie dollar would go any lower. His response was “It’s already pretty low, I doubt it will go any lower”. He was wrong.
Our poor Aussie dollar is currently being put through the wringer, feeling the ongoing effects of lower than expected domestic data and the escalating trade war between China and the USA. With this in mind, one Aussie dollar will buy you:
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Less than impressive domestic data
On Thursday, the employment report for April was released, showing the unemployment rate has jumped to 5.2%. This figure comes despite the creation of more than 28 thousand jobs, keeping annual and six-month annualised employment growth at 2.6%.
So how can the unemployment rate be up, despite all of these new jobs being created? Well, the Australian participation rate is currently climbing up to the highest levels on record. In other words, there are more people, particularly women, entering the workforce and looking for jobs. The number of people that entered the workforce in April outweighed the number of jobs created.
In addition to this, the underemployment rate rose from 8.2% to 8.5%, indicating that there is still spare capacity in the economy.
Earlier this month when the Reserve Bank of Australia (RBA) chose to keep interest rates on hold for May, they said that “further improvement in the labour market was likely to be needed for inflation to be consistent with the target”. In other words, they wanted the unemployment rate to decrease to support inflation and keep rates on hold. This week's disappointing employment figures show the exact opposite, with data softening instead of improving.
As a result, the odds of an interest rate cute in June went from 36% before the unemployment data, to 64% after the release. The AUD has now fallen to new cycle lows and is the lowest it has been since January 2016. Ouch.
Looking forward, markets have ‘priced in’ or accounted for an interest rate cut in both July and November. Next Tuesday, RBA Governor Philip Lowe is giving a speech that will likely indicate if there will be a rate cut next week; however, markets will be very surprised if he alludes to anything other than an interest rate decrease.
This week saw the trade war between the US and China intensify. This was not good news for the Aussie dollar, as our economy is pretty closely tied to China’s, so the AUD feels the effects of any negative performance that may ricochet as a result of the trade tensions.
By June, it is expected that all US exports to China will face tariffs between 5% and 25%. In addition to this, Trump has imposed regulations that restrict the world's second-largest smartphone maker, Huawei, from accessing the US market and American suppliers. In case you didn’t already know, Huawei is a Chinese company. Trump has done this in the hope of gaining dominance in 5G technology networks.
Despite this being a clear further escalation of trade tensions, markets were seemingly unaffected and shrugged off the information. This was good news for the AUD who couldn’t really cope with another blow this week.
In other good news, Trump has de-escalated trade friction with both the European Union and Japan by delaying auto tariffs for up to six months. He must have realised that it wasn’t the best idea to feud with multiple economies at the same time.
With another week of trading coming to a close, let’s cross our fingers, toes, arms, legs, and eyeballs in the hope that the Aussie dollar will see some reprieve and increase in value next week.
In the meantime, why not sign up to the Travel Money Club and go into the draw to win $500* every month?
Oh, and Brexit has had a few developments
There will be another vote on the current Brexit
deal in the first week of June. If the deal is rejected, Prime Minister Theresa May has promised to resign and set a timetable for the election of her successor.
It is expected that the deal will be rejected, especially considering it has been knocked back three times already. In addition to this, EU elections will start next week on the 23rd of May.
All in all, though, there have been no massive changes to the fact that no one has any idea about what Brexit means.
Definitions for those of us playing at home:
The participation rate measures an economy’s active labour force, a.k.a those employed or actively looking for work. It is calculated by dividing the sum of all workers by the working age population. It does not include those that aren’t looking for work.
The underemployment rate considers people that are highly skilled but working in low-paying or low-skill jobs, as well as part-time workers that hope to be full-time. In other words, it calculates the underutilisation of skills in the workforce.
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