The Aussie dollar was trending higher for the third straight session versus the US dollar on Friday. The Australian dollar US dollar exchange rate rallied to US$0.6845, a 1 month high. The pair is on track to gain 0.8% across the week, its third straight week of gains.

Today’s fresh advance in the Aussie was sparked by more hawkish than expected comments from the Reserve Bank of Australia’s (RBA) Governor Dr Philip Lowe. A more upbeat Dr Lowe said that negative interest rates were “extraordinarily unlikely”. He also talked down the prospect of more rate cuts, saying that the economy is expected to return to “trend growth” next year. This will boost unemployment and lift inflation.

His comments come after a solid labour market report which showed that the level of unemployment unexpectedly dropped to 5.2%.

Following the upbeat comments, financial markets are now assuming a 16% probability of interest rates being cut in November. This is down from a 40% probability just a few days ago. As fears of a rate cut ease, the Australian dollar has increased in value.

 

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.

 

Fed Speeches Up Next

The US dollar was trading broadly lower versus its peers on Friday. Dollar investors shrugged off gloomy Chinese GDP data. Third quarter GDP figures showed that the Chinese economy grew 6%. This was down from 6.2% in the second quarter and the lowest GDP reading in almost 3 decades. The data underscores the negative impact that the ongoing US – Sino trade dispute is having on the world’s second largest economy. Usually weak data from China unnerves investors, sending them in search of the US dollar for its safe haven properties. This hasn’t been the case today.

Looking ahead US dollar investors will focus on speeches from US Federal Reserve policy makers. Earlier in the week President of the Federal Reserve Bank of New York, John Williams, had expressed satisfaction with the US economy. He was reluctant to cut interest rates again. Today it is the turn of his colleagues, Esther George, Robert Kaplan and Vice Chair Richard Clarida. Any hints of dovishness could send the dollar 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.

 

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