The Australian dollar is advancing versus the US dollar for a second consecutive session. The pair closed 0.5% higher on Thursday at $0.6762 and was extending those gains into the weekend. The pair is on track for a 0.4% increase across the week.

Trade optimism is boosting the Australian dollar. Speaking at a campaign rally in Minneapolis, President Trump said that trade talks were going very well. His comments boosted hopes that the two powers would be able to hammer out some form of trade deal. Whilst a broad trade agreement is still unlikely at this stage, a limited trade deal would be an improvement on the current situation.

Investors will now wait for a meeting between President Trump and Chinese Vice – Premier Liu He, scheduled for later today. Any signs of progress could boost the Australian dollar. This is because Australia’s largest trading partner is China. A trade deal will be a positive for the Chinese economy and as a knock-on effect, a positive for the Australian economy.

Looking ahead to next week, the outcome of the trade talks will set the tone in the markets. However, Australian dollar investors will also look towards the release of the minutes from the Reserve Bank of Australia’s monetary policy meeting, as well as the labour market report.

Dollar Down Despite Strong Consumer Confidence

Whilst trade optimism has lifted the Australian dollar, it has weighed on demand for the US dollar. This is because investors see geopolitical tensions easing between the two powers- the US and China. When geopolitical risks fall, the demand for safe havens, such as the dollar, also decline.

US economic data has been playing second fiddle to trade talk and has been of a mixed nature. Yesterday, figures showed that US inflation remained subdued in September at 1.7%. This was below the 1.8% that analysts were anticipating. Weak inflation supports investor expectations that the Federal Reserve will cut interest rates again later this month.

 

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.

 

However, today’s US consumer confidence figures were much better than analysts had pencilled in, unexpectedly jumping to 96 points, up from 93.2 in September. A strong consumer tends to spend more, which is good news for the US economy and suggests the manufacturing slump is not spilling into the dominant consumer sector. The dollar shrugged off the upbeat data.

 

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.

 

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