The Australian dollar gained 0.3% versus the US dollar across the previous week, amid US – China trade deal optimism. The Australian dollar US dollar exchange rate rallied to a two-week high of US$0.6812. The pair is edging lower at the start of the new week.

The mood towards the Aussie dollar is souring on Monday, following disappointing trade numbers from China. Chinese exports dropped -3.2% compared to a year earlier in September. This was well below the -1% decline in August, and worse than the -2.8% fall that analysts had pencilled in. Import figures were also dismal, dropping a massive -8.5% year on year compared to a -5.6% decline in August. These numbers highlighted the damaging impact of the ongoing US – China trade dispute on the world’s second largest economy.

The Australian dollar moved lower after the data because the Australian economy is so closely linked to the Chinese economy. China is Australia’s largest export partner. Therefore, weakness in the Chinese economy is reflected in the Australian economy, and therefore the Australian dollar.

Australian dollar investors will now look ahead to the release of the minutes of the latest Reserve Bank of Australia’s (RBA) monetary policy meeting. This was the meeting when the RBA cut interest rates but said that the Australian economy could be slowly turning a corner. Any more optimistic comments in the minutes could help lift the Australian dollar higher.

 

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.

 

Investors Seek Safe Havens

The US dollar was in demand on Monday owing to its safe haven properties, amid lingering doubts over the outlook of the global economy, as investors took another look at the much – hyped breakthrough in US – China trade talks.

Whilst investor appetite for riskier assets had increased sharply on Friday, amid the phase 1 US – China trade agreement. Investors were less impressed on a second glance. Instead, viewing the pact as a month log standstill agreement, which in actual fact was just a promise and could easily be turned over.

With the effects of the trade dispute on full show in Chinese trade data and hopes of a serious agreement being achieved diminishing, investors were seeking the safe haven properties of the dollar.

There is no US economic data due for release until mid-week. Geopolitics will continue to drive the greenback.

 

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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