AUD News: The market reacts to falling oil prices, Fed rate hike predictions and Brexit

After hitting 0.7330 mid month, the AUD has fallen around a cent vs the USD, trading between 0.7200 and 0.7270 over the last week or so.  

 

In light of recent stock market falls, the market has adjusted its view of the US Federal Reserve’s stance on monetary policy. The futures market now sees a 34% chance of two US interest rate hikes by March 2019, compared to 49% a week ago. 

 

The Fed has slowly been increasing the interest rates since 2015 in an attempt to stop rapid inflation growth as the economy strengthens. 

 

President Trump has been very critical of the Fed at times, saying that increasing interest rates too quickly will slow economic growth and cause stock market lows.

 

What does this mean for Aussie travellers? Well, we can’t predict the future or how decisions will affect the AUD. However, if US interest rates increase it means investors are more likely to move their investments to the States (and away from Australia and other countries) seeking greater return. More demand for the USD will push its value up and, you guessed it, reduce demand for the AUD, therefore putting downward pressure on its value. 

 

Whilst the value of the AUD is influenced by a multitude of other factors, it is still worthwhile keeping tabs on US interest rate hikes as it will most likely have an effect on the AUD, especially if you are heading to the States in 2019. 

 

 

Another big story affecting foreign currency markets over the past week has been oil prices, which have fallen about 30% since early October (holla to those cheaper fuel prices, amirite!?). 

 

The downward pressure has come from surging supply coupled with a slowdown in demand growth. Should this trend continue, an oil supply surplus could occur next year. Whilst this is good for Aussie’s at the petrol pump (and probably the environment because lower demand must mean more people are embracing the lycra and biking to work instead of driving… right?) it might not be that great for the AUD.

 

The oil price will become an increasingly more important factor for the AUD in coming years as it is an important input into determining the price of liquified natural gas (LNG). Production of LNG is ramping up, making it a larger proportion of Australia’s commodity portfolio. 

 

Usually when commodity prices are strong (e.g. oil and LNG), the AUD is strong. This was shown during the mining boom in 2002 - 2012 when the AUD peaked at 1.10 against the USD. #thegoodolddays

 

 

Despite gaining the EU’s support over the withdrawal agreement on the weekend, there is still a high level of uncertainty around whether British MP’s will be as optimistic. British PM Theresa May will spend the next few weeks campaigning for the agreement amongst MP’s before they vote on the 11th of December. If they don’t agree, the EU have warned that there is no plan B except for a ‘no deal’. 

 

With this in mind, markets are wary and it continues to put downward pressure on the pound against the AUD, which is good for Aussie travellers heading to the UK. Last night the AUD went from 0.5418 to 0.5425 against the pound.

 

 

This Thursday, 29 November, also brings the beginning of the G20 summit, where the key focus will be ongoing trade tensions between China and the US. 

 

This is important for the AUD due to the intrinsic links between the Chinese and Australian economies. Should the trade tensions ease, it will be good news for the Aussie dollar. However, if the opposite occurs and relations between the US and China worsen, the AUD will most likely weaken. 

 

In particular, if President Trump decides to go ahead with a 25% tariff on $250bn worth of Chinese imports (which already have a 10% tariff), the flow on effects will hit the Australian economy and the AUD. 

 

 

If you are heading overseas for Christmas and are worried about currency fluctuations, why not add Rate Guard to your transaction? It’s free, and we will refund you the difference should the rate change within 14 days of purchase*.