The Australian dollar US dollar exchange rate closed the previous session virtually unchanged. The pair rose in early trade on Wednesday to a peak of US$0.6750 only to give up those gains as the session progressed.
The Australian dollar rose in early trade today despite disappointing consumer sentiment figures. Instead investors focused on US – China trade talk optimism.
Australian consumer confidence tumbled by more than 5% in October, dropping to a four-year low. The data will not please the Reserve Bank of Australia, which has cut interest rates three times this year. Consumer sentiment normally rises with rate cuts, but that hasn’t been the case here. This is bad news for the Australian economy because pessimistic consumers often rein in their spending.
Still, investors broadly shrugged the figures off, instead focusing on trade related headlines. Despite recent negativity surrounding the imminent trade talks, as Trump blacklisted Chinese tech firms and restricted Chinese officials’ visas, China has said that it is still interested in a limited trade deal. This would be on the condition that the US stops imposing tariffs. The prospect of a deal, even a limited deal boosted demand for the Australian dollar. The Australian economy is very closely linked to China’s. A trade deal would boost the Chinese economy and therefore is a plus for the Australian economy
Will Fed Minutes Pull US Dollar Lower?
The dollar was broadly out of favour on Tuesday as investors waited nervously for the start of US – Sino trade talks and as they look ahead to the release of the minutes from the latest Federal Reserve monetary policy meeting.
The minutes are from the last meeting where the Fed cut interest rates by 0.25%. However, investors considered it to be a hawkish cut as the Fed didn’t indicate any further interest rate cuts for the remainder of the year. In recent days several Federal reserve policy members have vocally given their support to another interest rate cut. Yesterday, Federal Reserve Chair Jerome Powell acknowledged softer US data and slowing job growth. Currently the CME Fedwatch tool indicates that US dollar investors are placing an 85% probability on the Fed cutting interest rates again in the October meeting. Should the minutes to the meeting show the Fed to more concerned over the health of the US economy then the dollar could fall further.
|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.|
|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.