16th April 2019
This morning the world woke up to devastating reports of Paris’ timeless monument, Notre Damn, being engulfed in flames. This news comes as avid fans scour last nights return of Game of Thrones in the hope of clues for the season to come.
Amidst these stories, it is a relief to see that foreign currency markets are relatively stable, with the Aussie Dollar making gains against all major currency crosses. The table below summarises how much extra travel money you would be taking if you exchanged $2000AUD today, compared to last Friday.
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The upcoming Easter break signals a short week for currency markets with rather sparse economic data releases scheduled. The key things expected to affect markets this week are, of course, President Trump, global interest rates and trade wars.
US/China Trade War coming to a close
After months of negotiations, it seems the US and China are at the pointy end of their talks with a trade deal in sight. This is great news for the Australian economy and AUD, due to our strong trade ties with China.
The positive news about these talks provided a welcome increase to market risk appetite, which is generally good news for the Aussie dollar. Should the trade deal have been unsuccessful, the Australian economy would have felt the adverse flow-on effects from a slow down in the Chinese economy as it felt the brunt of increased tariffs.
In addition to this, the AUD is considered a more risky investment, so an improvement in market risk appetite equates to more people wanting to invest in the Aussie dollar. This can then put upward pressure on its value, which is great news for Aussie tourists hoping to get more bang for their travel money buck.
New Trade wars on the horizon?
As the US/China trade war appears to be simmering down, there is growing concern that new trade wars will erupt between the US and Japan and the US and Europe. Great.
There isn’t a whole lot to report yet apart from these facts:
- Trump is hoping to reduce the USA’s current $60 billion trade deficit
- The US and EU are threatening each other with billions of dollars in new tariffs
- Japan is frantically trying to avoid extra tariffs on auto exports to the US.
Currently there has been no significant impact on the value of the AUD, however, we will be sure to keep you updated as necessary. If you are worried about currency fluctuations, 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*.
Trump continues to be a keyboard warrior
President Trump has used Twitter to throw serious shade at the US Federal Reserve Bank. His tweet was directed at their recent decisions about interest rates and quantitative tightening, saying “If the Fed had done its job properly, which it has not, the Stock Market would have been up 5000 to 10,000 additional points” [i.e., ~20-40% higher].” He also mentioned the quantitative tightening they were doing was a killer and that they should have done the exact opposite.
This tweet comes two days after European Central Bank President Mario Draghi expressed his concern over the independence of the US central bank, particularly as it is one of the most important jurisdictions in the world.
In other US Central Bank news, Chicago president of the Fed, Charles Evans, indicated in an interview that he sees interest rates remaining unchanged until the fall of 2020. If this is true, and Aussie interest rates don’t also get cut, this is positive news for the AUD. An increase in US interest rates generally puts downward pressure on the value of the Aussie Dollar, as the rate differential increases. Investors will move their funds to the country that will provide the greatest return. If the US has higher interest rates they are, in turn, offering a better return. This then flows on to there being less demand for the AUD and a decrease in its value.
Canadian dollar weakens after a data release
The Canadian dollar was hit by weak data overnight. The Bank of Canada Business Outlook Survey was -0.6 in Q1 2019. This is down from 2.2 in Q4 2018 and is the lowest level since Q3 2016. In addition to this, March home sales only grew by 0.9%. Despite the increase, it did little to help after the 9.1% plunge seen in February’s figures.
Like the rest of the world, Canadian markets are toying with the idea that the next interest rate move from the Bank of Canada will be a cut.
All of this led to the weakening of the Canadian Dollar against the AUD, which is great news for Aussie’s headed across the Pacific.
The Reserve Bank of Australia minutes released today.
The RBA released the minutes of their April 2nd meeting today. The minutes indicated that there was a low likelihood of a rise in interest rates in the near-term.
Whilst the board saw no strong case for a near-term move in interest rates, a cut may be “appropriate” should inflation remain low and unemployment increase.
On the global front, the minutes highlighted that financial conditions had eased, with Chinese stimulus having an impact.
These comments were mostly in line with market expectations, and are unlikely to have a major impact on the value of the Aussie Dollar.
Definitions for those of us playing at home
Interest Rate Differential (IRD)
Interest rate differentials essentially measure the difference in interest rates between two securities, or countries. Foreign exchange traders use IRDs when forecasting foreign exchange rates.
Quantitative Tightening, a.k.a. unwinding the balance sheet
After the Global Financial Crisis in 2007, the Fed purchased a huge amount of long term assets (we’re talking trillions of dollars) to rapidly increase the value of their balance sheet in hope of putting downward pressure on long term interest rates. This inflated the size of the US balance sheet.
Since then, assets have begun to mature and the Fed has continued to purchase new ones, essentially replacing them, to maintain the size and composition of the balance sheet. This occurred for about three years until the US economy moved more in line with the Fed’s targets. From here, the Fed wanted to start reducing the huge balance sheet by very slowly letting older bonds mature by not reinvesting.
This notion started towards the end of 2017. However, now the US economy is apparently not as fine and dandy as thought (compared with late last year), and so the Fed has started slowing interest rate increases. As a result, there is some talk of slowing (if not stopping) the current runoff from the balance sheet.
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