The Australian dollar snapped a four-day winning streak versus the US dollar on Tuesday. The Aussie dollar US dollar exchange rate declined to a low of US$0.6850 at the time of writing.

Even though Australian consumer confidence flashed a positive sign to investors, the Australian dollar failed to extend its winning run to a fifth straight session. Australian consumer confidence rose 0.6%, following last week’s -1.2% decline. This is good news for the economy because a strong consumer tends to spend more.

The lift in consumer confidence goes hand in hand with the central bank’s more optimistic outlook. Last week Reserve Bank of Australia’s Governor, Dr Philip Lowe sounded significantly more hawkish than he had for a long time. Investors pushed back on expectations of another interest rate cut. As a result,the Australia dollar has rallied over recent sessions.

 

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 will now look ahead to pmi readings. Analysts are expecting manufacturing activity to have slipped into contraction amid the ongoing US – Sino trade dispute. However, analysts predict that the service sector will remain resilient, in expansion territory. This could support the Aussie dollar.

US Home Sales Data Up Next

Amid a lack of trading headlines, US dollar investors are focusing their attention on mid-tier US economic data. US home sales will be under the spotlight. Analysts are forecasting a decline in homes sales month on month by -0.7% in September, after a 1.2% increase the previous month.

Whilst the Federal Reserve cutting interest rates has offered support to demand. Uncertainty over the health of the US economy is also weighing on demand. Furthermore, if house buyers believe that the Fed will lower interest rates further, they could be tempted to hold off from buying a home, in order to wait for a better mortgage rate. A weak reading could sour the mood towards the dollar.

 

Why does poor economic data drag on a country’s currency?
Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.

 

Wednesday is another quiet day as far as US economic data is concerned. Investors will look ahead to Thursday’s durable goods reading.  Analysts are forecasting a -0.8% decline in durable goods. This could suggest that the manufacturing slump in the US is spilling over into the US consumer sector. Poor results could prompt investors into expecting the Fed to cut interest rates again this month.

 

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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