The sterling vs Australian dollar interbank exchange rate gained this week, in part because UK Chancellor of The Exchequer Sajid Javid said that he thinks a UK/EU trade deal can be signed this year, and because UK government borrowing was lower than forecast in December.
Meanwhile, the Australian dollar lost out, even though the labour market Down Under did better than forecast in December. The AUD declined, both because of the ongoing bush fires in Australia, and because of reports of a coronavirus in China, which could drag down both Chinese tourism to Australia, and antipodean exports to the world’s second largest economy.
All of these events come ahead of the Reserve Bank of Australia’s (RBA) crucial interest rate decision on February 4th, when we’ll see whether the central bank holds interest rates at 0.75%.
This week we learnt that Australia’s unemployment rate unexpectedly fell by 0.1% in December to 5.1%, according to the Australian Bureau of Statistics (ABS). This was below both economists’ forecasts for 5.2%, as well as November’s result of 5.2%. Australian companies created a bumper 28,900 new jobs last month, exceeding financial markets’ predictions for 15,000 positions.
This has benefited the Aussie dollar, first because it suggests that Australian companies continued to hire in December, despite the bush fires. Also, this brings joblessness Down Under closer to the RBA’s informal target of 4.5%, which the central bank considers necessary for rising inflation and living standards.
However, as I mention, the AUD has weakened this week, despite the upbeat jobs figures. In part, this is because of reports that a coronavirus has hit Chinese cities including Beijing, Shanghai and Wuhan, effecting Asian markets.
This is a similar virus to the SARS that killed almost 800 people in 2003, so could convince the Chinese government to impose a national quarantine. If so, fewer Chinese tourists may visit Australia this year, while China’s appetite for Australia’s exports could fall too, potentially weakening Australia’s economy. This fear has weakened the value of the Aussie.
Looking ahead, all eyes will be on the RBA’s interest rate decision on February 4th, and whether the central bank cuts borrowing costs below 0.75%, or “keeps its powder dry”.
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