After snapping a four-day winning streak in the previous session, the Australian dollar was extending those losses on Wednesday. At the time of writing the pair was trading -0.2% lower around US$0.6850.
The Aussie dollar has continued to trend southwards amid fading optimism over a US — China trade deal. US Commerce Chief, Wilbur Ross, played down the prospect or the need for a trade deal to be signed by November. He said the emphasis should be on the right deal being achieved, not the deal being achieved by next month. His comments poured cold water on hopes that China and US were close to a phase 1 trade deal.
The Australian dollar is particularly sensitive to US — China trade dispute developments. This is because China is Australia’s largest trading partner. The health of the two economies is very closely linked. A trade deal would be beneficial for China’s slowing economy and therefore also beneficial to the Australian economy and Aussie dollar.
Investors will continue monitoring trade headlines. Attention will also turn to Australian pmi figures which are due to be released later.
The Reserve Bank of Australia cut interest rates to a record low earlier this month. However, RBA Governor Dr Philip Lowe sounded more hawkish in a recent speech. Investors will analyse the PMI figures closely to see whether they are supportive of Dr Lowe’s more optimistic stance.
Growing Fed Rate Cut Expectations
The dollar shrugged off poor existing homes sales data on Tuesday. Existing homes sales declined -2.2% month on month in September, after two months of gains.
The dollar is holding its ground after selling off across the previous week. Weak data has investors believing that the Federal Reserve will cut interest rates again on the 30th October at the Federal Reserve monetary policy meeting. According to the CME Fedwatch tool, investors are pricing in a 93.5% probability of the Fed cutting rates this month.
|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.|
There is no high impacting US economic data due until tomorrow. Tomorrow’s US durable goods order will provide further insight into the health of the US consumer. A strong reading could lift 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.