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AUD news: Markets react to FOMC interest rate hike and Australian employment data.

20th December 2018
Overnight the Aussie dollar fell from 0.6975 to 0.6895 against the USD. If you were exchanging $2000AUD, that’s a difference of about $16USD in your back pocket. 
 
So, what caused the AUD to fall? A few things, but the key driver was the US Federal Open Market Committee (FOMC) increasing interest rates in their final press conference of the year. 
 
 
This FOMC rate hike was widely expected by markets (even despite President Trump’s last-minute protests). The increase now takes the US interest rate range to 2.25% - 2.50%. 
 
Perhaps the most interesting part of the conference was the accompanying statement made by the FOMC, “The Committee judges that some further gradual increases will be consistent with their economic objectives”. To compare, the November statement was “the Committee expects that further gradual increases...”. Blink and you’ll miss it, but their use of the word ‘some’ this month is key for market predictions.
 
The market was expecting this statement due to the ‘dovish’ symptoms (it’s not a bird, or a plane in the economy - check the definition below) of the economy as the USD rose and the stock market fell (much to Trump’s dismay). The Fed often releases point to point guides to indicate the timing and moves of future rate changes. The latest guide indicates there may be two hikes in 2019 and one further hike in 2020. This is a little less ‘hawkish’ in nature then what was indicated six or so months ago. For those that think the Fed is raising rates too quickly (President Trump), this change of sentiment can be seen as good news. 
 
How will this affect us humble Aussie travellers? 
Well, it’s important to keep in mind that foreign currency is influenced by a number of factors. However, an increase in interest rates in the US will generally mean the value of the USD will increase relative to the AUD (not good news for those of us planning a US road trip in the next few years). 
 
We recommend keeping an eye on markets and the news so you have an idea of what is affecting foreign currency. It’s also worth signing up for rate alerts so that you are notified when your preferred currency hits a certain rate. 
 
Brexit
There are now only 99 days until Brexit and the UK is no closer to reaching an agreement on the terms of their ‘divorce’ with the EU. Britain is essentially facing three main choices: 
  1. agreeing on a last-minute deal
  2. abandoning Brexit
  3. leaving the EU without a deal. 
 
An EU executive has cautioned that most banking, insurance and financial firms will be abruptly cut off from the EU if there is no deal in place on March 29, 2019.
 
As you can imagine, this would not be ideal for the UK or the pound. As much as we hate to say this though, it might not be terrible for Aussie travellers exchanging their currency, as we could get a fair bit more bang for our buck. There’s nothing wrong with making the most of a bad situation… right? 
 
Back on home shores
Yesterday the Australian Prudential Regulation Authority (APRA) announced it would remove the 30% cap placed on lenders issuing interest-only loans. This cap was put in place in March 2017 to try and put the brakes on booming house prices, particularly those in Sydney and Melbourne. 
 
This cap, alongside other measures, have been successful in seeing house prices in Sydney and Melbourne fall over the course of this year. This follows on from the move in April 2018 to relax another restriction on lenders that require them to limit investor credit growth to 10%
 
The removal of the interest-only loan cap could generate increased demand in real estate investments, possibly driving property prices back up, and driving young Australians who don’t own their own home back to the comfort food of smashed avo. 
 
In other Australian economic news, employment data was released this morning and showed that the economy gained 37,000 jobs in November. This number exceeded most market expectations that the increase would be around the 20,000 mark.
 
The unemployment rate increased from 5.0% to 5.1% off the back of a rising participation rate. The mix between full time and part time jobs was a little bit disappointing, with part-time jobs rising 43.4k and full-time jobs falling 6.4k. In addition to this, the under-utlisation rate (the unemployment rate and underemployment rate) remains reasonably high at 13.6%. This probably explains the slower wage growth that is currently being experienced. 
 
How does employment data affect Aussie travellers?
Slower wage growth and higher unemployment indicates Aussies may have less income to pay for travel. Falling house prices also make the prospect of owning a home AND travelling more of a reality. 
 
With that in mind though, consumer sentiment and the perception of wealth is tied to property prices. In other words, people stop spending as much when their house price doesn’t rise. 
 
If you are heading overseas over the festive season, don’t leave purchasing your foreign currency until the last minute! Visit your closest Travel Money Oz store, or simply order online today.
 
Definitions for those of us playing at home:
 
Dovish vs Hawkish
 
These are terms that refer to the general sentiment of a country’s central bank when talking about monetary policy. 
 
The bank will take a hawkish stance when they want to prevent excessive inflation. This is often done by increasing interest rates. Increasing interest rates generally puts upward pressure on the value of that country’s currency, as investors can now get a greater return. 
 
The bank will take a dovish stance when the economy is not growing and the government is seeking to guard against deflation. You guessed it; this could lead to decreasing interest rates which would put downward pressure on the value of the currency. Just keep in mind that this value is still relative to other countries, so a dovish stance is not always bad news for the value of the currency. 
 
An easy way to remember: hawks fly higher than doves. So when markets talk about things being hawkish, it generally means things are going up. You normally see doves on the ground, so if there is talk of things being ‘dovish’, things may be going down. 
 
Interest-only loans
In an interest-only home loan, your repayments only cover the interest on the amount you have borrowed during the interest-only period (in contrast with a Principal & Interest loan, where your repayments cover both the interest you owe to the bank, as well as paying off your mortgage). 
 
Interest only home loans have lower repayments in the short term and may provide greater tax deductions on an investment property, however, they are ultimately more expensive in the long run. 
 
This blog is provided for information only and does not take into consideration your objectives, financial situation or needs.  You should consider whether the information and suggestions contained in any blog entry are appropriate for you, having regard to your own objectives, financial situation and needs.  While we take reasonable care in providing the blog, we give no warranties or representations that it is complete or accurate, or is appropriate for you.  We are not liable for any loss caused, whether due to negligence or otherwise, arising from use of, or reliance on, the information and/or suggestions contained in this blog.
All rates are quoted from the Travel Money Oz website, and are valid as of 20 December 2018.