Happy Tuesday everyone! Fingers crossed you had a better start to the week than Saudia Arabia. Not only is it sweltering there and they probably spend excessive amounts on sunscreen, but Saturday saw an attack on two of their major oil refineries. These attacks led to a pretty sticky (pun intended even though I’m not sure if oil is, in fact, sticky?) situation for Saudi, as well as the broader economy. No sweat for the AUD though, while it did see some impact it has posted gains against several G10 currencies when compared to Friday. As it stands, one Aussie Dollar will buy you:
0.6675 US dollars
70.968 Japanese yen
0.531 Great British pound
1.0446 New Zealand dollars
0.8902 Singapore dollars
All oil puns aside, Saturday’s attack by ten explosive drones took out two major oil refineries or about 50% of their total oil production. This might not sound huge, but the attack has essentially taken out 5% of the world’s daily output of crude oil, or roughly five million barrels.
Yemen’s Houthi rebel group has since claimed responsibility for the attacks; however, both the USA and Saudi Arabia have cast their doubts, instead pointing the finger at Iran. Both countries believe evidence from the attacks points towards Iran as the culprit, pending confirmation of course.
On Sunday, Trump posted a Tweet in response to the attacks stating America was “locked and loaded” against the culprit. Meanwhile, while Iran has vehemently denied the allegations, they have also noted they are ready for a full-fledged war.
After the attack, the price of oil skyrocketed by over 10%. Saudi officials suggest that exports may restart within days (may being the key word here). Bloomberg noted it would take weeks, if not months before the majority of output is restored.
The attacks and resulting increase in oil prices had a significant impact on the economy and financial markets. Even though oil production will recover, markets were shaken, resulting in negative investor sentiment. This is on top of an already fragile economic backdrop due to fears of recession, the impact of the US/China trade war and uncertainty of Brexit. Negative sentiment in the markets generally pushes investors towards ‘safe haven’ investments like the Japanese Yen. Such was the case after the attacks, where the JPY rose by 0.3% against the USD.
The yen wasn’t the only winner after the attacks. Canada and Norway are also major oil exporters, and both saw an increase of 0.5% and 0.6% in their currencies against the USD.
The AUD is considered a ‘risky investment’ so these adverse market conditions generally put downward pressure on its value. While the attacks may have capped the AUD’s success, there wasn’t a significant decrease in its value; instead, it posted gains against a few major currencies. The Aussie dollar is currently trading firmer against several oil-linked currencies. It is also worth noting that Australia is a significant exporter of gas, and the gas price is closely linked to oil with about a five-month lag. This leads markets to believe that gas prices (a.k.a. Aussie exports) may rise in a few months.
Currencies aside, another significant impact of the attacks is the implication it could have on fuel and transport prices. Sure the AUD might be doing well; however, the cost of air travel is profoundly impacted by the cost of fuel. This is before we even consider the unpleasant prices we may be forced to pay at the pump when filling up our cars. The increased proportion of household spending on transport and fuel means less is going into other sectors of the economy. This is bad news for global economies facing the prospect of recession should things not speed up.
All in all, markets are still absorbing the ricochets of the attack, and we will no doubt see further effects as more information comes to light.
Attacks aside, this week will also see the US Federal Reserve release their monthly interest rate decision. Markets predict the Fed will cut rates by 25 basis points on Thursday. This move could potentially put some upward pressure on the value of the AUD.
Only time will tell how markets and the value of the AUD will go. In the meantime, if you need to purchase foreign currency, be sure to add Rate Move Guarantee to your purchase in-store. It’s free, and if the rate improves within 14 days of purchase we will refund you the difference!*
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