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AUD News: Brexit and the Trade war continue to influence the Aussie Dollar

30th August 2019

Friday or Groundhog day? I'm not sure at this point, especially considering we have been reporting on Brexit and the US/China Trade War for over a year with little to no resolutions. Not only am I craving some new content, but the poor old Aussie dollar has been put through the wringer. As we all count down to a five pm Friday beverage, let's take a look at what has impacted the AUD this week. With the weekend in sight, one Aussie dollar will get you:

0.6544 US dollars 
68.5367 Japanese yen
0.5836 Euros
0.5308 Great British pound
0.8407 Canadian dollars
1.0294 New Zealand dollars
0.8802 Singapore dollars

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Boris met the Queen's Corgis, oh and the Queen approved his request to suspend parliament

British Parliament is set to resume after their summer break next week. The new UK Prime Minister, Boris Johnson, however, has given up on his summer tan early and instead busied himself by asking Queen Elizabeth for a small favour. His request? A mere parliament suspension from September 9 until October 14. No biggie, right? Such an application is a formality under the UK constitution to allow a new Prime Minister time to organise legislation and their policy agenda. Except when that suspension occurs just weeks before the UK is set to leave the European Union. 

Queen Elizabeth approved Johnson's request, meaning MPs will have minimal time to oppose a no-deal Brexit, due to take place on October 31. Widespread protests erupted across the UK as a result, with over one million people signing a petition against Johnson's plan to close parliament.  

Many have challenged Johnson's motives as a means of pushing through a no-deal Brexit and a clear move against democracy. House of Commons speaker, John Bercow, described the decision as a constitutional outrage aimed at stopping parliament from debating a solution to Brexit and a means of stifling the voices of those wishing to avoid a no-deal Brexit. Protestors have even gone so far as to promise 'civil disobedience' should Johnson's plan go ahead. 

Opposition leaders unsuccessfully requested a meeting with the Queen in the hopes she would block Johnson request. On Tuesday 160 MPs opposed to a no-deal Brexit signed a pledge to prevent a no-deal exit "using whatever mechanism possible". One such course of action is to remove Johnson as PM via a no-confidence vote. 

News of the suspension did not bode well for the value of the pound, pushing it's value down against most major currencies including the Aussie dollar. The value of the pound will be severely undermined, should the suspension go ahead and result in the UK crashing out of the EU without a deal. The silver lining in all of this is that it might give UK-bound Aussie travellers more bang for their buck in the short term. The long-term outlook for such an instance is not ideal, though, as a no-deal Brexit is by no means good for the global economy. 

Trump told a porky, and China wants him to back down on Tariffs

On Tuesday it was reported that Chinese officials hopped on the blower and told Trump's administration that they were hoping to restart trade talks. Trump seemed super positive about the negotiations, just days after he tweeted that he was slapping another tariff increase on Chinese goods. Tuesday's 'positive news' rippled through markets, giving them new hope and global currencies a small boost. China was having none of it though, with their Foreign Ministry Spokesperson, Geng Shuang, saying he had no clue about these so-called conversations.

Well, news hot off the press today says that surprise surprise, Trump maybe, kinda, could have made up these 'high-level' phone calls to boost jolted markets. These reports are not confirmed, but based on old mate Shuang's complete lack of knowledge around said phone calls, I think Trump has probably told a fib or at least exaggerated the truth. 

While Aussie's shouldn't complain, because his comments did provide the AUD with a tiny (and very much needed) boost, should the trade deal once again turn sour it will undermine the value of the AUD. Our strong trade ties and love of honey chicken mean the Australian economy and dollar are inextricably linked China, so anything negative that happens with the trade war is felt here.

Further to those ties, the AUD is considered to be a risky currency that thrives during 'risk-on' environments. In other words, when there is smooth sailing in global markets (no trade wars, limited risk of recessions, etc.), there is upward pressure on the value of the Aussie dollar. When the opposite occurs, so basically what is happening now, investors will move to 'safe haven' currencies like the JPY and USD, putting downward pressure on the AUD as a result. 

Trade talks between the US and China resumed today after China's commerce ministry spokesperson, Gao Feng, suggested that, instead of China retaliating against the US over Sunday's planned tariff increase, the US should cancel them. Feng acknowledged that escalating the trade war isn't good for China, America or the broader world that is teetering on the prospect of a recession. The positive request injected some hope into markets; however, I wouldn't get my hopes up too much. 

Should the tariff increases continue as planned, China will no doubt continue with their expected tariff increase on US goods. Thus escalating the trade war and continuing to fester the bad blood between the US and China. 

Australian's aren't building as much

Thursday saw the release of Australia's Capital Expenditure figures. Markets forecast 0.5% growth, instead spending shrunk by 0.5%. It turns out if consumers can sense the economy is slowing down, they will refrain from spending as much. A 3.3% decline in spending on buildings and structures was the key driver of the results. This decline was, however, offset by the business support that has resulted from Liberal's surprise election win and cuts to interest rates.

This news is certainly not ideal for the struggling Aussie economy and is yet another confirmation that the Reserve Bank of Australia is likely to cut interest rates further in their September meeting. 

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