The AUD rose slightly against the Greenback overnight as the Federal Reserve signalled the possibility of interest rate cuts before the end of the year while the Bank of England voted unanimously to keep rates on hold for now. It’s been a busy week for Central Banks around the world as a continually shifting economic climate, and the burden of the US/China Trade War continues to weigh on their minds and strategies for the short-term.
Continuing its plucky resistance in the face of mounting international pressures, 1 AUD will buy you:
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Economic analysts and savvy travellers alike had been waiting to hear from RBA chief, Philip Lowe and sink their teeth into the RBA minutes from earlier this month to get a glimpse into the thinking of Australia’s Central Bank. Getting an idea if more rate cuts are on the way is a great way to stay on top of possible foreign exchange fluctuations and avoid the shock of any sudden drops.
On Tuesday, the release of the RBA minutes from the meeting this month where interest rates were cut showed that the RBA is indeed looking to ease rates again further. When dissecting RBA comments, it’s important to look at the tone of their comments for clues, particularly around any urgency they may identify. Despite less than impressive employment data this month and the RBA viewing the Australian economic outlook as ‘reasonable’, the final paragraph of the RBA minutes concluded – “it was more likely than not that a further easing in monetary policy would be appropriate in the period ahead”.
Not that this information was exactly groundbreaking, as markets barely moved and appear to now be fully pricing in two RBA rate cuts before the end of the year. As to whether the next cut would be arriving in July or August, as usual, the RBA wasn’t quite that forthcoming.
It is also likely that the RBA will be keenly watching the G20 summit later this month to see if President Trump and Xi Xinping can ease trade tensions and look to create a more stable trading environment moving forward. Australia’s economy is commodity and trade heavy, meaning that it is easily spooked by harsh trade rhetoric and tied closely to the performance of the Chinese economy. If the US/China Trade War continues unabated and local employment and inflation conditions don’t show an improvement, expect the AUD to take a hit in the short-term.
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It’s been a busy week in more ways than one in the UK. For starters, the race to replace Theresa May as Conservative Party leader has narrowed to the final two candidates – Boris Johnson and Jeremy Hunt. Fears of a No-Deal Brexit have allayed slightly as Johnson’s usual harsh Brexit talk softened a little this week as he distanced himself slightly from the potentially disruptive option. While the possibility of a hard Brexit remains, with the Conservative Party elections heading to the background it will not be as in your face, and the GBP will be hoping not as disruptive as it has been.
At the Bank of England this week there were no calls to join Australia and New Zealand in dropping interest rates as UK inflation data and household income held in the region hoped for by the Central Bank. Business investment is still weak as companies grapple with the Brexit situation, however, if a smooth Brexit process eventuates and trade tensions ease, the Bank of England may even raise interest rates.
Contrast this with the European Central Bank president, Mario Draghi’s remarks that “additional stimulus will be required” unless there is an improvement in a range of risks such as “geopolitical factors, the rising threat of protectionism and vulnerabilities in emerging markets” and you still have plenty of uncertainties in the region to deal with.
On the back of the UK decision and less Brexit drama, the AUD barely held ground against the GBP, and with a lack of upcoming data, much of a short-term rise against the Pound is not expected.
The US dollar remained on the defensive against most major currencies, losing ground to the AUD yesterday after Wednesday's dovish Federal Reserve statement, suggesting that the US central bank could ease monetary policy in the short-term. The Federal Reserve stated that uncertainties have increased and inflation pressure has eased, leading to a large drop US Treasury bond yields and further downward pressure on the greenback.
The statement said that “uncertainties” had increased, particularly trade tensions with China. With the G20 summit fast approaching, all eyes will be on the Trump-Xi dynamic in the hopes for a more positive trading environment.
Further complicating matters is the Trump-Federal Reserve dynamic, with the President being clear that he wants to see interest rates drop. The Federal Reserve’s short-term moves could trigger a confrontation between Federal Reserve Chairman Jerome Powell and Trump, as speculation is growing that Trump is not Powell’s biggest fan. Asked this week whether the President was considering demoting the Fed Chairman, he stated “let’s see what he does” is relation to dropping interest rates. Yikes.
Further putting pressure on the USD this week are escalating tensions in Iran, as both parties up the tough talk and a military confrontation begins to look more likely.
With a rapidly growing number of issues on its plate, the next few weeks are critical to the performance of the USD/AUD as markets digest each bit of news and try to make sense of the growing uncertainty. The positive for the AUD is that a dovish Federal Reserve is offsetting the dovishness of our own RBA which might help the AUD in the short-term.
With so much going on at the moment it can be hard to stay on top of all the currency movements, so why not sign up to Rate Alerts and let us do the hard work for you. Choose your currency, elect your ideal rate and we will send you an alert when it hits that point.
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