Overnight, risk sentiment in the market improved and the AUD rose from 0.7220 to 0.7277 against the USD
. This is positive news, especially considering the stock market volatility we saw at the beginning of the week.
Last night's trading session (we usually talk about Australian nights as that is when the USA and Europe are awake) was a bit calmer as we led into the Thanksgiving holiday, where U.S. markets will close for the day.
An improvement in risk sentiment, coupled with the market perhaps starting to believe that the USA’s Federal Open Market Committee (Fed) might consider pausing, or at least slowing, the pace of interest rate tightening has seen the USD weaken - but only slightly. Lower interest rates mean less return on investments, so investors will go elsewhere. This results in less demand for the USD and a decrease in its value, which is good for Aussie travellers heading to the States.
The end of Thanksgiving brings Black Friday, which is the traditional start to the US holiday shopping season. Black Friday is renowned for shoppers frantically trampling over each other to get a toaster for $5 (bargain) or fight to near death to save $100 on a TV (extra bargain). With some commentators becoming concerned about the potential for the US economy to slow down, Black Friday will be analysed closely to see if there are any cracks appearing in the US consumer.
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After Black Friday, the market will return focus to the US-China trade tensions as the G20 summit is coming up next weekend. The trade tensions are certainly not subsiding, and recent headlines are not very encouraging.
The Office of the US Trade Representative released a 53 page report yesterday after an investigation into China’s trade practices regarding technology transfer, intellectual property, and innovation. The report concluded that “China fundamentally has not altered its acts, policies, and practices” in this area and “appears to have taken further unreasonable actions in recent months.”
What does this mean for the AUD? Well if Trump and Chinese President Xi fail to come to an agreement, it could potentially lead to more tariffs on Chinese exports into the States. More tariffs makes Chinese productsmore expensive and reduces the demand for Chinese goods. Given the Chinese economy is closely tied to Australia, any uncertainty and poor performance in the Chinese economy has negative flow on effects for the Aussie economy and AUD.
Elsewhere in the world, this Saturday British PM Theresa May return to Brussels for ongoing Brexit talks, before an EU Summit of European leaders on Sunday. With London and Brussels already agreeing to the draft terms of the UK’s exit, this weekend will show if other EU member states are happy to agree as well.
The uncertainty around Brexit continues to affect the pound, giving Aussie traveller the upper hand when exchanging for GBP
Definitions for those of us playing at home:
Risk Sentiment (Risk-averse mood)
This refers to changes in investment activity based on the level of risk tolerance in the market. If the risk is perceived to be low (risk-on) the theory states that investors are more willing to engage in higher-risk investments. Likewise, when the risk is perceived to be high (risk-off), investors will seek lower-risk investments.
Federal Open Market Committee (Fed)
The FOMC is the Federal Open Market Committee. A 12 person body that focuses on monetary policy in the United States.
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