As the slew of public holidays sadly come to an end, the Aussie dollar continues to be impacted by both domestic and international happenings. With that in mind, one Aussie dollar will get you:
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Look, last week definitely wasn’t the best for our little Aussie dollar. Despite a pretty tumultuous time, it has managed to remain in a tight two-cent trading range against the USD. The main drivers behind the fall to the bottom of said trading range are:
- Last week’s release of Australian inflation data
- Last week’s release of Q1 Gross Domestic Product data for the USA
Let’s take a look at both these releases in a little bit of detail and see what they might mean for your holiday cash.
Australian Consumer Price Index (CPI) Inflation release
The release of Australia's Q1 Consumer Price Index (CPI) data saw all measures of inflation come in well below market expectations - this wasn’t great for the Aussie dollar. The headline inflation number was flat in Q1, which disappointed markets that were expecting a 0.2% rise.
The Reserve Bank of Australia (RBA) usually likes to use the Core CPI number, which strips out all the volatile components (like the impact of seasonality) of the headline number. Core CPI came in at 0.3% quarter on quarter, bringing year on year total to 1.6%. Considering the RBA’s target for inflation is between 2.0% and 3.0% year on year, it is clear that Australia is tracking behind, and has been since 2016.
Why does the RBA have an inflation target? Well, it helps to achieve broader goals of price stability, employment and prosperity for Australians. Price stability comes hand in hand with stable economic growth; however, we don’t want inflation to be so low that it results in deflation.
This, in turn, influences the value of a currency. Low inflation puts pressure on the RBA to lower interest rates. Low interest rates put downward pressure on the value of the AUD as investors move their money elsewhere seeking a higher return.
This pressure has been reflected in the value of the AUD over the past week with the market now expecting a rate cut in May and August 2019. These cuts were accounted for or ‘priced in’ last week following the release of this CPI data, which is why the Aussie dollar fell to the bottom of its trading range last week.
US Q1 Gross Domestic Product (GDP)
Last week saw the release of US GDP data for Q1. Despite Q1 including the longest US government shutdown in history
, GDP rose 3.2% year on year. This came as a surprise to markets who were only expecting a 2.3% rise.
The increase was driven by a surge in inventories and a slight decline in imports. All in all, the 3.2% growth makes it evident that the US economy is growing. Despite this, the Federal Open Market Committee is unlikely to change US interest rates at their meeting this week. Instead, they may change their rhetoric in a way that supports an interest rate hike in the future. Such a hike would put downward pressure on the value of the Aussie dollar.
A few weeks ago we spoke about the inverted bond yield curve
and warnings of a recession. The growth in GDP leads markets to think otherwise, signalling that the US is not headed toward a recession after all. That is assuming future data out of the US remains positive.
US/China trade talks
Today will see a fresh round of trade talks between US and China representatives take place in Beijing. A White House statement said talks “will cover trade issues including intellectual property, forced technology transfer, non-tariff barriers, agriculture, services, purchases and enforcement”. Sounds like a super fun meeting, eh?
These issues have remained significant throughout the past few months of talks and remain unresolved. Markets eagerly await an outcome from these talks for 2 reasons:
If the trade talks fall through it will have a significant impact on currencies as new tariffs are potentially put in place
This whole topic has been dragging on for way too long.
If you’re planning on purchasing your currency soon, we recommend adding Rate Guard
to your purchase in store. It’s free, and if the rate improves within 14 days of purchase we will refund you the difference. Simple, but way more exciting than keeping up with trade talks.
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