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AUD News: AUD sees slight gains amidst Brexit news and the inverted bond yield curve

26th March 2019
Overnight the Aussie dollar was able to make some gains after a pretty abysmal end to last week. As it stands, one AUD will buy you:
 
0.6914 US dollars
0.596 euros
 

What is affecting currency markets this week?

 

The inverted bond yield curve

There have been some interesting developments in the world of financial markets lately. One that has caught a lot of people’s attention is the inversion of the US bond yield curve.
 
A yield curve graphs the difference between interest rates on long-term and short-term investments. A normal curve shows long-term investments paying high rates of interest. An inverted curve means the opposite, with short-term bonds paying higher interest than long-term ones. The curve itself is considered a reasonably accurate measure of economic sentiment in the market. It is a leading economic indicator, with the previous success of predicting the economic future. 
 
The yield curve hasn’t inverted since 2007. Six months later, the US fell into an 18-month recession, dragging the wider global economy down with it. 
 
As you can imagine, this recent inversion has caused quite a bit of chatter around what it could mean for the economy. At this stage, there aren’t many economists declaring the sky is falling and predicting a recession, however it is definitely something to keep our eyes on. 
 
Following inverted bond yield curve’s inversion, traders increased their bets that a US interest rate cut could be on the cards, with markets predicting a 60% chance of a rate cut by December 2019. 
 

The effect on the Aussie dollar 

This news has been relatively positive for the AUD, despite some of the troubles we’ve been seeing in Australia with regard to our own economic data. 
 
The Aussie dollar is likely to consolidate and trade in a fairly narrow range this week, being supported by the February employment report gains released last week and commodity prices, which are holding relatively firm for now. 
 
The current view from the Reserve Bank of Australia (RBA) is that the negative impact of falling house prices (also known as the negative wealth effect) is pretty small and wage growth, or lack thereof, is a bigger factor when it comes to household consumption levels. However, if the fall in house prices continues for a long period of time it is hardly going to help our economy. 
 
The RBA is keeping a close eye on employment numbers. It’s likely that last week’s drop in the unemployment rate will encourage them to keep interest rates at their current level, despite the lower participation rate. This will allow them to “keep their powder dry”, should there be a serious slow down in the economy. 
 
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Brexit - something kinda happened (but also not really). 

Overnight, the United Kingdom parliament won a vote that will temporarily allow them to take control of the government on Wednesday. Before we delve into what this means, let’s just do a quick recap on the differences between parliament and the government. 
 
Government: runs the UK and parliament 
Parliament: comprised of the House of Lords and the House of Commons. Members of Parliament and Lords that aren’t part of the government. Parliament monitors and scrutinises what the government is doing. 
 
In essence, the Government can’t make new laws or raise taxes without Parliament giving the nod of approval. Despite this, Government officials (like Prime Minister Theresa May) are still the big dogs calling the shots. The Government also controls what is debated in Parliament. 
 
If we roll back to last night’s events, MPs voted to take control of Parliament on Wednesday to vote on potential amendments to the government's current withdrawal agreement. They may vote on up to seven different options, including a second referendum, leaving the EU with no deal and giving the UK full access to the EU single market. 
 
These are called indicative votes. They aren’t legally binding, so the Government doesn’t have to follow through with the results, however, they are a pretty good indicator of what commands the majority in Parliament. 
 
Wait a minute...
 
Hang on, haven’t they already voted on a number of these options? Essentially, yes. 
 
As it stands though, the British Parliament is in a pretty gnarly deadlock over this whole Brexit ordeal, so they are hoping to gain insight into what the majority wants through these votes. Of course, they run the risk of having no majority at the conclusion of these votes, thus remaining in the said political deadlock that continues to waste everyone's time. 
 
Apart from the indicative votes, Wednesday will also see MPs discuss and vote on removing March 29 from UK law as the day they leave the EU. Prime Minister May is hoping to pass new legislation that will align the UK’s departure with the EU’s decision last week. If the legislation is successful, the earliest Brexit will happen is 11pm on the 12th of April, just over two weeks from now. Any later than this and the UK faces the prospect of taking part in the EU elections. 
 
Meanwhile, a petition to revoke Article 50 and remain in the EU is nearing 5.5 million signatures from UK citizens...
 
If you’re planning on braving Britain’s current political landscape with a jaunt to the UK, we recommend checking out how Brexit may affect your travel plans
 
As you would imagine, the changing political climate is also having an effect on the value of the pound against the Aussie dollar. The last few weeks/months has shown the pound strengthen when the government indicates they are closer to a decision and further away from a no-deal. Aside from this, markets have very little idea of what will happen to the AUD/GBP as we quite frankly still have no idea what is happening with Brexit. 
 
With this in mind, it’s worth adding Rate Guard to any of your purchases in store. If the rate changes within 14 days of purchase, we will refund you the difference, allowing you some peace of mind amidst a pretty uncertain time. 
 
 
Definitions for those of us playing at home:
 
Participation rate
This measures an economy’s active labour force, a.k.a those employed or actively looking for work. It is calculated by dividing the sum of all workers by the working age population. It does not include those that aren’t looking for work. 
 
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