The Australian dollar is trending lower versus the US dollar for the second straight session. After losing 0.2% in the previous session and closing at US$0.6775, the pair is down a further 0.3% today.

The Australian dollar is losing ground as investors digest the minutes from the Reserve Bank of Australia latest meeting, more weak numbers from China and amid fading optimism surrounding the US – China trade pact agreed last week.

The minutes from the RBA October meeting, where the central bank cut interest rates to a record low of 0.75%, showed policy makers were anxious about taking rates so low. Some analysts argued that rates should be held steady in case the global economy deteriorated further.  However, the minutes also showed that the central bank is prepared to cut interest rates further if needed. The prospect of more cuts sent the Aussie dollar lower.

 

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.

 

Also weighing on demand for the Australian dollar was weak data from China. Chinese inflation at factory level, as measured by the producer price index (ppi) declined to -1.2% in September after having decline -0.8% in August. Given that Australia’s economy is so closely tied to China, any signs that the Chinese economy is under strain can negatively impact the Australian dollar.

Geopolitics Boost Dollar

The dollar is advancing on Tuesday as investors remain focused on geopolitical developments. Optimism is fading over the US – China trade pact that was agreed last week. After the initial upbeat response, investors are now seeing the pact as more of a trade truce rather than a meaningful trade agreement. This means that tariff risks remain very real, which is unnerving investors.

President Trump announcing economic sanctions on Turkey elevated geopolitical risk. Trump said that he would destroy the Turkish economy after Turkey moved in to invade Syria following the US withdrawal of troops from the region.

When geopolitical risks increase, the value of the dollar often increases too. This is because investors look to buy into the dollar, the reserve currency of the world, for its safe haven properties.

There is no high impacting US economic data due for release until tomorrow. Analysts forecast that US retail sales could dip lower in September which could weigh on the dollar.

 

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.

 

This publication is provided as general information only and is not intended as an exhaustive treatment of its subject. TransferWise Inc. and its affiliates (“we” or “us”) expressly disclaim any contractual or fiduciary relationship with you on the basis of the content of this publication, and you may not rely thereon for any purpose. You should consult with qualified professionals or specialists before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax, investment or other professional advice from us.  We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date, and DISCLAIM ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.