The Australian dollar rebounded versus the US dollar in the second half of the previous week. The pair closed the week flat at US$0.6770. Australian dollar is losing ground in trade on Monday.
The Australian dollar was edging lower at the start of the week, giving back some of the gains from the end of the previous week. Whilst the Reserve Bank of Australia cut interest rates by 0.25% for the third time this year last Tuesday, the Australian dollar had recovered relatively quickly.
| Why do interest rate cuts drag on a currency’s value? |
| Interest rates are key to understanding exchange rate movements. Those who have large sums of money to invest want the highest return on their investments. Lower interest rate environments tend to offer lower yields. So, if the interest rate or at least the interest rate expectation of a country is relatively lower compared to another, then foreign investors look to pull their capital out and invest elsewhere. Large corporations and investors sell out of local currency to invest elsewhere. More local currency is available as the demand of that currency declines, dragging the value lower. |
Today trade concerns were weighing on demand for the Australian dollar. US and China are due to restart trade negotiations in Washington later this week. However, reports circulating suggest that the talks could be destined to fail.
US — China negotiations have hit a sticking point. China is unlikely to offer commitments on reforming Chinese industrial policy, which could prevent negotiations from progressing much further. Investor concerns are rising that China will try to drive a hard deal, given that Trump’s need for an agreement has increased in light of the slowing US economy.
The Australian dollar often falls out of favour when trade tensions between the US and China increase. This is because the Australian economy is so closely tied to that of China. The Australian dollar is considered a liquid proxy of China.
Looking ahead Australian dollar investors will focus on the National Bank of Australia’s business confidence index due to be released early on Tuesday.
US Dollar Higher Owing To Safe Haven Properties
The US dollar was advancing versus the Australian dollar on Monday, as investors looked to the greenback for its safe haven properties amid increased uncertainty over the US — Sino trade dispute. With little on the US economic calendar to focus on US dollar investors are looking to trade headlines.
Federal Reserve Chair Jerome Powell is due to give a speech later today. However, analysts are not expecting him to touch on US economic performance or monetary policy outlook. Instead investors will need to wait until Wednesday when the minutes from the latest Federal Reserve monetary policy will be released. This will provide further clues as to what the US central bank intends to do next. Currently the Fed is not looking to cut rates again this year, even though investors think they should.
| What do these figures mean? |
| When measuring the value of a pair of currencies, one set equals 1 unit and the other shows the current equivalent. As the market moves, the amount will vary from minute to minute.
For example, it could be written: 1 USD = 0.6784 AUD Here, $1 is equivalent to approximately A$0.67. This specifically measures the US dollar’s worth against the Australian dollar. If the Aussie dollar amount increases in this pairing, it’s positive for the US dollar. Or, if you were looking at it the other way around: 1 AUD = 1.4739 USD In this example, A$1 is equivalent to approximately $1.47. This measures the Australian dollar’s worth versus the US Dollar. If the US dollar number gets larger, it’s good news for the Aussie dollar. |
