It’s been a pretty wild ride in currency markets over the last 48 hours or so with the Australian dollar whipping around quite significantly. Before we take a look at the news influencing these big moves, let’s check in on how much $1AUD will get you today:
The first big story of the week that affected the value of the AUD was the release of the US Federal Reserve Bank’s minutes of their January 29-30 meeting. These minutes showed a slight reversal in the language and stance used regarding monetary policy compared to mid to late 2018.
According to the minutes, Federal Open Market Committee (FOMC) members favour ending the runoff of the central bank’s balance sheet in the second half of the year, much earlier than the market had expected. They also expressed some uncertainty over whether rates will rise again in 2019. What does this actually mean though? We’ve tried to simplify it as much as possible.
After the Global Financial Crisis in 2007, the Fed purchased a huge amount of long term assets (we’re talking trillions of dollars) to rapidly increase the value of their balance sheet in hope of putting downward pressure on long term interest rates.
Since then, assets have begun to mature and the Fed has continued to purchase new ones to maintain the size and composition of the balance sheet. This occurred for about three years until the US economy moved more in line with the Fed’s targets. From here, the Fed wanted to start reducing the huge balance sheet by very slowly letting older bonds mature and not reinvesting.
This notion started at the end of 2017/start of 2018. However, now the US economy is not all fine and dandy, and so the Fed has started slowing interest rate increases. As a result, there is talk of slowing, if not stopping, the current runoff from the balance sheet.
It does seem a little strange that we always hear how well the US economy is doing, yet the interest rate rises are seemingly off the table now. Interest rate rises are generally a symptom of an economy performing well.
Either way, this more dovish stance (definition below) has been supportive of the AUD, which seems to need all the help it can get at the moment. Fewer interest rate rises in the US means investors have had fewer reasons to move their capital away from Australia and into the US; after all, they’re seeking greater returns.
Thursday was a very big day for the Aussie dollar. On the positive side, the January jobs report was released and was much stronger than anticipated. More than 39 thousand new jobs were created in January 2019, resulting in a stable unemployment rate of 5%. Slightly surprising insights from the report were that the number of full-time jobs rose by more than 65 thousand, while part-time jobs fell by just over 26 thousand. Following this release, the AUD/USD exchange rate jumped from 0.7165 to 0.7207.
Unfortunately, this spike up above 0.7200 didn’t last too long. Within an hour or so, Westpac’s well regarded Chief Economist, Bill Evans, released an update to the bank’s interest rate forecasts.
Mr Evans has joined the growing list of economists that expect the next move in Australian interest rates to be down, forecasting interest rate cuts in both August and November. This would reduce the Reserve Bank of Australia’s (RBA) cash rate down to an unprecedented 1.00%. This is not great for the Aussie dollar (or Aussie tourists), as lower interest rates mean fewer people will invest in the AUD, thus putting downward pressure on its value
Westpac also revised down Gross Domestic Product (GDP) growth forecasts for both 2019 and 2020 to 2.60% and 2.20%. The new figures are quite a bit lower than the RBA’s original forecast of 3.00% and 2.75%, respectively. The release of this forecast caused the AUD to fall back to 0.7150, such is the respect the market has for Westpac’s Chief Economist.
The AUD was further beaten down by a report that the major Northern China port of Dalian had banned coal imports from Australia indefinitely. It’s a little unclear if this is actually true and, if it is, what this means going forward. Watch this space on that for now.
In terms of our other main themes, being US/China trade talks and Brexit, the trade talks are apparently continuing with no new developments to report.
British Prime Minister Theresa May is facing another string of walkouts from the Conservative party as they protest the country’s current trajectory toward a no-deal Brexit
Next Wednesday will see British MPs face (another) vote in which many are seeking a delay to Article 50, as well as a rule out of a ‘no deal’.
Prime Minister May has already survived two rounds of resignations, and is currently working to secure changes to the current withdrawal deal with the EU in hopes of Parliament approving it.
Long story short, there has been a lot of political talk and power plays, however Britain is still no closer to any sort of Brexit agreement. This will continue to affect the value of the pound as markets digest the constant stream of political dribble that is coming out of the UK.
If you are travelling to the UK soon, it’s definitely worth keeping an eye on Brexit happenings (as painful as that might be) to take advantage of any dips in the value of the pound against the AUD.
Should you be travelling anywhere else, movements and commentary from the US, China and domestic sources will be your best bet for insight into the value of the AUD.
If this sounds a bit too tedious, or if you simply have better things to do than watch the happenings of the AUD (like maybe plan a holiday), simply sign up for rate alerts
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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.
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All rates are quoted from the Travel Money Oz website, and are valid as of 22 February 2019