GBP/USD: Dollar Steady Amid US - China Trade Developments

The Australian dollar remains in recovery mode versus the US dollar on Thursday. After rebounding off a low of US$0.6672 in the previous session, the pair is comfortably back above US$0.6700.

The mood towards the Aussie dollar stayed strong on Thursday even after investors witnessed disappointing trade balance data. August’s trade data suggests that the headline trade balance grew less than what analysts were anticipating. A weakening iron ore price brought the trade balance down to a lower than forecast AUS$5.93 million in August. This represents an 18% drop from July’s reading, which was the second highest on record as metal prices sat at record highs.

The Australian dollar could remain in favour as investors look ahead to tomorrow’s retail sales numbers. Analysts are predicting that Australian retail sales recovered in August after declining -0.1% month on month in July.

Retail sales figures are closely watched by market participants because they are a good gauge for future inflation. A strong reading could lift the Australian dollar higher.

Dollar Slips Amid More Weak Data

The US dollar dropped out of favour in the previous session as concerns over the health of the US economy continued to grow. ADP private payroll data showed that the average monthly number of jobs created in the private sector was just 145,000 compared to 214,000 a year earlier. The slowing pace of hiring shows that demand for hiring has weakened.

The ADP payroll figure is closely watched because it has a strong correlation to the US non-farm payroll report. The NFP report is the most keenly awaited release of the month and will print tomorrow. Both investors and the Federal Reserve use the NFP to gauge the health of the US labour market and the US economy. A weak ADP figure points to a weak NFP figure.

Today investors are looking ahead to the service sector activity reading. Investors will be watching closely to see whether the slump in manufacturing is spilling over into the dominant service sector. Any signs of weakness in the readings could raise fears that the US is heading towards recession and that the Fed will need to cut interest rates again before the end of the year.


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.


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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