AUD News: Sigh of relief for Aussie travellers as interest rates remain on hold

After a troublesome end to last week, courtesy of Donald Trump, data released today in Australia has given the AUD a small confidence boost. Whilst we wait to see the effect on the AUD tomorrow, today one Aussie dollar will buy you:

 

0.6792 US dollars

73.8875 Japanese yen

0.5976 euros

0.5126 Great British pound

0.8833 Canadian dollars

1.0199  New Zealand dollars

0.8974 Singapore dollars

 

 

After weeks of being told the trade war between the US and China as progressing well, last Friday saw President Trump tweet quite the opposite. 

 

Trump threatened to increase the tariff rate from 10% to 25% on US$200 billion worth of imports from China. His tweet expressed his annoyance with the time it has taken to reach a trade deal, stating "The trade deal with China continues, but too slowly, as they attempt to renegotiate." It appears China was pulling back on the language for several issues which could significantly impact the deal. 

 

Trump’s tweet was a backhand to the already struggling Aussie dollar, causing it to fall sharply against the USD. Australia has robust trade ties with China, so an increase in tariffs for China could see flow-on effects to Australia. While this is significant, the downward pressure on the Aussie dollar came as a result of a shift in market sentiment. The AUD is considered to be a risky investment, so a shift towards a ‘risk-averse’ mood puts pressure on its value. Trump’s tweet did exactly that, hence the corresponding fall in the AUD’s value.  

 

The Trump effect did fade overnight though, which provided some relief for the Australian dollar. Markets now must wait until Thursday and Friday when Chinese delegates travel to Washington for continued talks. Should there be a negative result, expect to see an impact on the AUD’s value, and subsequently, the amount of travel money you will be taking overseas. 

 

In other non-Trump-tweet related news out of the US, Friday also saw the release of non-farm payroll numbers for March. 

 

This data accounts for employment in goods, construction and manufacturing companies, excluding (as the name would suggest) farm workers, private household employees and non-profit organisation employees. 

 

The numbers painted a pretty dandy picture of the US labour market, seeing the addition of 263k jobs in March. This came in above the market forecast of 190k. This report also saw the unemployment rate fall to 3.6% which is the lowest level since 1969. 

 

This data put upward pressure on the value of the USD which, in turn, had the opposite effect on the value of the AUD. 

 

Today is a big day for Aussie data with the release of March retail sales and trade balance data, as well as the Reserve Bank of Australia’s interest rate decision. 

 

March retail sales saw an increase of 0.3%, led by sales at cafes, restaurants and takeaway food services and food retailers. Good old Sunday brunch and Friday take-out support our retail sales growth. Do you think they count Bunnings snag sales as part of this figure?

 

While the growth is positive, it is not a strong enough data to give the AUD any extra oomph against other currencies. 

 

The Australian trade surplus for April was $4.9billion. The March surplus was also revised higher to $5.1billion from $4.8billion. 

 

Once again, good news but nothing too crazy. Both of these figures were released at 11:30am, after which there were no significant fluctuations in the value of the Aussie dollar. 

 

Today the Reserve Bank of Australia (RBA) announced that they will be keeping interest rates on hold at 1.5% for May. This is a weight off the Aussie dollar’s shoulders as it already struggles with the above-mentioned impacts. 

 

Markets were expecting a cut of 25 basis points and, as a result, the cut was priced in (or accounted for) in the value of the Aussie dollar. Before this decision, markets had very much decided that it wasn’t a question of if the RBA will cut interest rates, but rather when they will cut them. We will now wait for the report and commentary to be released on Friday for a better indication of if/when the rate cut is expected. 

 

So why did markets expect the interest rate cut? In short, last week’s release of Q1 Consumer Price Index inflation data missed the mark. The data was flat, so year on year inflation came in at 1.6%. This is well below the RBA’s target of between 2.0% and 3.0%. The easiest way to boost inflation is to undercut the value of the currency. 

 

A cheaper currency aids in boosting an economy because it makes exports more affordable (and more competitive), imports more expensive and domestic industry more appealing. In other words, our exports are cheap as chips because other countries’ currencies are worth more than the AUD, making us more appealing. This also means it’s more expensive for Aussies to import from overseas, pushing us towards domestic retailers instead. All in all, this means there will be more money circulating in the Aussie economy which will theoretically boost inflation and wages, thus giving Aussie homeowners some relief on their home loans and reducing debt. Simple, right?

 

While this may benefit our domestic economy, a rate cut is risky with a federal election looming. The political fallout that would come as a result of a rate cut would have no doubt weighed on the minds of the RBA.

 

Finally, a rate cut is just no-good, dirty, rotten news for Aussie travellers that don’t give a flying fart about mortgages and just want a good deal when exchanging AUD for foreign currency. A decrease in Aussie interest rates puts direct downward pressure on the value of the AUD as it increases the rate differential against the USA. In other words, the US kept its interest rates on hold last week. Cutting our interest rates widens the gap between the two rates and pushes investors out of Australia and into the US as they seek a greater return on their investments. 

 

For now, Aussie travellers can breathe a sigh of relief as it is one less pressure pushing down on the value of the AUD. Let’s hope the AUD sees some sort of bonus out of this result.