8th February 2019
It’s been a big week in currency markets and unfortunately, the Aussie dollar didn’t hold on to the gains it made last week.
The table below details today’s rate and provides a comparison for exchanging $2,000 AUD vs. exchanging the same amount last Friday.
As you can see, there is a significant difference, and this is just in the space of a week. If you’re kicking yourself because you didn’t exchange last Friday fear not. Simply add Rate Guard to your purchase in store and, should the rates improve within 14 days of purchase, we will refund you the difference*.
Let’s take a look at what’s happened in global markets this week to see why this downturn in the AUD has occurred.
An AUDinary week with Aussie interest rates
Perhaps the biggest story and influence on the Aussie dollar this week was the comments made by Reserve Bank of Australia (RBA) governor Philip Lowe on Wednesday after the RBA’s first meeting of the year.
The RBA cash rate (interest rate) has not changed since August 2016. Throughout most of 2018, the vast majority of financial commentators (and the market) thought the next move would be an increase in interest rates. This narrative started to change towards the end of the year when a few commentators starting suggesting the next move would be a decrease.
On Wednesday, Lowe stated in a speech that, "looking forward, there are scenarios where the next move in the cash rate is up and other scenarios where it is down. Over the past year, the next-move-is-up scenarios were more likely than the next-move-is-down scenarios. Today, the probabilities appear to be more evenly balanced."
This statement triggered a more aggressive downside pricing of interest rates. There is now a 50% chance of a cut by August 2019, and a 100% chance of a cut by February 2020.
This new market pricing and change in narrative has put significant downward pressure on the AUD against most major currencies. With investors now expecting to get a lower return from their Australian ventures, it is likely they will invest in another country (and therefore their currency).
All things considered, there is definitely a more cautious outlook from the RBA regarding the effects of slowing global economic growth and falling house prices on the wider Australian economy.
Humpty Dumpty still homeless due to lack of wall in the USA
The resumption of the US government shutdown is quickly approaching, with a February 15th deadline in play. In other words, the Republicans and Democrats have one week to come to an agreement about the infamous border wall between the USA and Mexico, or the government shutdown will resume.
President Trump reiterated his desire to build a wall to increase border security during his State of the Union address earlier this week.
Agreement on the issue seems a fair way off, however, there is still time for a vote next week ahead of the Feb 15 deadline. During an interview this week, acting White House Chief of Staff Mick Mulvaney said that if Congress doesn’t agree to President Trump’s request for $5.7 billion for a wall, “we’ll figure out a way to do it with executive authority”.
The fact that Mulvaney has mentioned putting their ‘executive authority’ into play means the government is not scared of calling a National Emergency to get the wall done.
China and the USA have thrown away their friendship bracelets
As it stands, on March 1, the Trump administration is scheduled to more than double the current tariff rates on US$200 billion worth of Chinese exports into the US.
Delegates from both the US and China have been meeting to secure a trade deal to avoid this happening, with Trump and President Xi Jinping supposed to meet prior to this month. A senior administrator official has stated that it’s “highly unlikely” that this meeting between the leaders will take place.
There is still a lot of work required before a deal will be made, with rules on intellectual property theft and state support for high-tech and industrial industry companies proving to be the biggest sticking points in the negotiations.
Should the tariff increase occur, there will be significant downward pressure on the value of the AUD, due to our close trade relations (and dependance) on the Chinese economy.
Brexit is still a thing
British Prime Minister Theresa May's mission to Brussels to discuss amendments to the current divorce agreement ended with no sign of a compromise. Honestly, this is just not fun for anyone involved.
This will force May and senior EU leaders back to the negotiating table to try and break the impasse. On February 13, PM May is scheduled to update British Parliament on the status of her efforts to unlock her Brexit deal.
As the March 29 deadline approaches, there is still no certainty that Britain will avoid crashing out of the EU with a no deal - the default option, should an agreement not be reached.
The level of uncertainty surrounding Brexit has pushed the Bank of England to reduce their UK economic growth forecast in 2019 to 1.2%. This would be England’s slowest rate of growth since the financial crises in 2011.
Karma, karma, karma, karma, karma Commodities
The beginning of last week saw iron ore prices soar due to a dam disaster (an actual dam, not a ‘damn disaster’, though both work in this instance) in Brazil decreasing supply. Iron ore is one of Australia’s major exports, so this price increase was the booster seat the AUD needed to sit at the big boys’ table for a little while.
The Chinese markets were on holiday to celebrate Chinese New Year this week. Celebrations conclude next week, and Chinese trade and business will return to normal next week.
Financial services company, Credit Suisse, expects the resumption of Chinese markets will increase prices to around $US100 per tonne.
“We have been concerned about the lack of rebuild of port stocks in China,” says Matthew Hope, Research Analyst at Credit Suisse, in reference to the current level of iron ore inventories stored at Chinese ports.
“Next week, iron ore restocking ahead of the Spring construction season should begin. With port stocks remaining depleted, bidding for spot cargoes by port traders may be strong to replenish depleted trading stocks.”
It will be interesting to see if this expected surge next week will once again help the Aussie dollar, or if markets have already priced it in to the point where it will have minimal effect.
Either way, hold on tight. We’re in for a wild ride next week.
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All rates are quoted from the Travel Money Oz website, and are valid as of 8 February 2019
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