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AUD News: Inverted Bond yields and Brexit dominate AUD movements this week

29th March 2019
It has been a tumultuous week for the Aussie battler dollar. The lingering air of Brexit uncertainty, coupled with the US and Australian bond yield curves inverting has put a lot of pressure on the AUD’s movements. With this in mind, one Aussie dollar will buy you:
 
0.6882 US dollars
0.6044 euros
 
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Australia Bond Yield Curve

Earlier this week we talked about the inversion of the US yield curve and the implications for the Australian dollar and economy in general. Well, today the Australian yield curve has followed suit. 
 
In the US, the inversion of the yield curve has preceded every recession in the last 50 years. So, should we all start running to the hills as the next recession is near? The answer is no, though it might have an effect on interest rates. 
 
Australia is a little bit different from the US in this regard (and many other regards for that matter!). Since the last recession in Australia in late 1990’s, the “recession that Australia had to have” as the then Treasurer Paul Keating described it, the yield curve has inverted four times and we have avoided a recession on each occasion. It is, however, a fairly good indicator on the direction of interest rates with 6 of the last 7 inversions resulting in an interest rate cut. Interestingly, financial markets are now expecting two interest rate cuts by August next year, with one cut fully priced in by August this year.  
 
Interest rate cuts can put downward pressure on the value of the Aussie dollar, as it could increase the rate differential in comparison to other countries such as the US. This encourages investors to move their money away from Aussie investments seeking a greater return. Less demand for our investments = downward pressure on the AUD. 
 
Now, let’s talk about some positives! Data released yesterday showed job vacancies in Australia rose to a new all-time peak in the three months ending February. Total job vacancies rose a seasonally adjusted 1.4% to 245,300 in the December to February quarter - the highest reading since the series began in 1979. 
 
Vacancies were up 9.9 percent on prior year, although this pace of growth did slow from the previous quarter. Given the RBA will be looking at jobs data very closely when deciding the next move in rates, this was good news for those who still see the next move in rates as being up. 
 

It's Brexit Day! 

Just kidding, the UK still has no idea what they are doing when it comes to Brexit. Luckily for them, they have been granted a few extra days to try and get themselves sorted.  If British MPs can agree on a deal today, they’ll wipe the sweat off their brows proclaiming ‘phEU’, as they will have an extension until the 22nd of May. However, if they can’t agree on a Brexit withdrawal agreement (which is pretty likely based on past behaviour), they will only have until the 12th of April before the UK leaves the EU. 
 
On Tuesday we explained that, on Wednesday, British MP’s were having some indicative votes to try and figure out what the majority wants. Eight votes were held, and none of which claimed a majority. 
 
The air of uncertainty that came with this put downward pressure on the value of the pound, which was great news for the AUD and Aussie travellers (we need all the help we can get at the moment). Buying $2000AUD worth of pounds on Tuesday would have given you £1022. Purchasing the same about today would give you an extra £20 taking you to £1042.20. That’s an extra two pints at a pub in London - pints you might need to cope with all of the Brexit drama. 
 
Considering none of the indicative votes were successful, British Prime Minister, Theresa May, will be putting forward another vote today in the hopes that they can secure the May 22 extension. This vote will be slightly different to the others though, as they would only be voting on half of the deal. 
 
The current withdrawal agreement is made of two parts:
Part one - The Withdrawal agreement. This is a legally binding document setting out the terms of the UK’s departure from the EU. It includes a settlement, information on what the transition period would look like, protection of citizen rights and the controversial Irish backstop. 
 
Part two - The Political Declaration. This outlines the future relationship between the UK and the EU after Brexit and is not legally binding. 
 
Theresa May plans only to put part one forward to vote which is causing quite the stir amongst MP’s. In addition to this, Prime Minister May has also stated that she will resign if her Brexit deal is agreed upon by MPs. This will allow someone else to lead the remaining negotiations with the EU. 
 
Should they agree on part one, it will technically grant them the extension until May 22; however, it would not ratify the deal as they need part two of the agreement for that to occur. The Government would then need to pass part two of the agreement, or change the law so that part two isn’t necessary to ratify the deal. 
 
If MPs don’t agree on part one, then the UK will only have until April 12 before they leave the EU. This will most likely lead to more ‘indicative votes’ on Monday, and the prospect of a ‘no deal’ will become more of a reality. 
 
The next few weeks will be turbulent and are likely to have an influence on the value of the pound against the Aussie dollar. If you’re heading to the UK soon, we recommend researching how Brexit will affect your travels. It’s also worth adding Rate Guard to your transaction in store. It’s free, and if the rate improves within 14 days of purchase, we will refund you the difference*. 
 
 
Definitions for those of us playing at home:
 
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. 
 
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All rates are quoted from the Travel Money Oz website and are valid as of 29 March 2019
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