The Australian dollar is continuing to move in a downward direction as investors move funds out of the Aussie and into the US dollar. The Aussie has now fallen to a 2 ½ year low against the US dollar, highlighting how much of an impact the interest rate hikes in the US are having on AUD exchange rates. The interest rate differential is expected to widen further in the coming months with no change in interest rates expected from the Reserve Bank of Australia (RBA) whilst the US Fed are expected to hike again in December.
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Interest rates down under have been held steady at 1.5% for more than two years whilst rates in the US have moved to 2.25%, the highest levels seen post credit crunch.
The problem for the Aussie is that the RBA is not expecting to change direction any time soon and as the differential widens further this could result in further Australian dollar weakness. The RBA has cited both weak wage growth and a cooling housing market as strong reasons to refrain from raising interest rates at this time.
The Aussie could see a boost if there were to be a change of approach but this seems unlikely in the short term. The earliest timing for a rate hike would be some time mid 2019.
The Aussie is also feeling the squeeze after the Peoples Bank of China intervened at the weekend by cutting the required amount of funds that banks in China must hold on reserve in order to lower finance costs and encourage growth. The move is expected to inject 750 billion yuan into the Chinese banking system. It is believed that the Central Bank is concerned that the trade war with the US may continue to escalate and this could be damaging for the Chinese economy hence the action being taken now. This is all relevant for the Australian dollar which is impacted by these developments, considering China is Australia’s largest export market. The Chinese economy is already seeing slower growth and stock markets under pressure. Not knowing the full impact of the trade tariffs at this time leaves an uncertain outlook for the Chinese economy and hence the Aussie. It has been suggested that China is sufficiently concerned to implement such a stimulus, which would suggest the official outlook from China’s view has deteriorated.
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