Today’s Key Market Drivers: 20th December 2018
“Trump is not going to be happy about more rate hikes.”
The US Dollar has risen sharply following the US Federal Reserve’s December statement that confirmed it has put the official cash rate up another 0.25% to 2.5% and it expects to put rates up another two times in 2019. As I mentioned yesterday the market would be caught short on the US Dollar and traders unwound those positions quick smart as the greenback surged and US stock markets made new lows. The Dow Jones saw a swing of close to 500 points erasing an early morning 100-point gain to close down 375 points or 1.5%. US stock markets are going to close another very bearish week with the size of the December weekly falls not seen since the 1930s. Emerging market currencies fell sharply along with the Aussie and Kiwi Dollars and the safe haven Yen and Swiss Franc rallied strongly as the negative sentiment resumed.
I want you to keep things in perspective and really understand why we are seeing a sell-off on US stocks and the AUD v USD and NZD v USD. Interest rates drive the value of virtually everything including currency and stock market values. Here is a quick guide as to what is going on right now.
- The US Fed’s official interest rate was 0% for 7 years following the GFC in 2008 and is now 2.5%. Investors had little options available to make a return on investment when rates where 0% between 2008 and 2014 so they invested heavily in the US stock market as the US Central Bank pumped trillions of US Dollars into the economy which boosted the share price of US companies. The US stock market rallied over 250% between 2008 and 2017. Investors in the USA can now get 2.5% on their money in the bank and the US Fed just told the market today that by the end of 2019 this will be 3%. Sure, it’s only 3% but that’s a guaranteed 3% vs the uncertainty of what they would receive from stock values. There is now a credible guaranteed alternative that is safe and secure. So traders are selling down portfolios and putting money back into cash.
- The official interest rate in Australia back in June 2011 when the AUD v USD was 1.10c against the greenback was 4.75% vs 0% in the USA. Global investors could get a guaranteed 4.75% on their money leaving it in Aussie Dollars vs 0% putting it in US Dollars, 0.5% in British Pounds and 0% in Euro’s. Fast forward to December 2018 and US interest rates are now 2.5% and soon to be 3% and the official interest rate in Australia has fallen from 4.75% to 1.5%. In other words, you can now get a full 1% better putting your money in US Dollars vs Aussie Dollars and the markets view is that interest rates in Australia won’t rise for another 9 months and the US Fed just confirmed today rates in the USA will continue to rise another two times in 2019.
Currency values moving in big trends all comes down to interest rate differentials and when you embrace this fundamental fact and continue to focus on what interest rates are doing globally you will seriously enhance your opportunity to win big and maintain a higher level of confidence in what you are doing.
Third quarter GDP for New Zealand was released at 8.45am AEDT today showing the island nation growing at 2.6% annualised vs the 2.8% expected and added further downward pressure to the Kiwi Dollar. The Aussie Unemployment number for December is due at 11.30am AEDT.
Today sees the release of the Bank of Japan and Bank of England’s final statements for 2018 with the market not expecting any significant changes in policy from either Central Bank. The BOJ is currently holding the official cash rate in Japan below zero and printing trillions of Yen in an attempt to lift inflation to 2% and is unlikely to indicate it plans to change policy any time soon. This is the reason why I don’t believe the Yen deserves “safe haven status” but who am I to talk. The Bank of England has already indicated that it would like to raise the official cash rate again but its hands are tied until a Brexit deal is done and confidence and stability are returned to the UK economy.
Train With Andrew Podcast Episode 1 with Gary Gorrow Meditation guru to the stars.
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About the Author: Andrew Barnett
Andrew is a professional trader and successful investor who has a strong focus on education. He is a regular Sky News Money Channel Guest and one of Australia’s most awarded and respected financial experts and is regularly contacted by the Australian Media for the latest on what is happening with the Australian Dollar. Director at LTG GoldRock, Andrew Barnett, guides thousands of traders around the world in the live market on a daily basis, advising them on buy and sell directions, as well as trading his own personal account. Andrew, a regular keynote speaker at trading and wealth-creation events throughout the Asia Pacific region, is an authorized representative registered with the Australian Securities and Investment Commission (ASIC).
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