Today’s Key Market Drivers: 24th January 2019

Aussie Dollar falls half a cent after NAB hikes interest rates.

The Aussie Dollar fell sharply this afternoon immediately following National Australia Banks decision to raise its variable home loan and business finance rate by 0.16%. NAB previously held off on lifting rates in line with other banks who in 2018 sited higher funding costs and raised rates out of step with the RBA. NAB told the market today that it could no longer hold its interest rates at the current levels and higher funding costs globally has forced its hand.

So why did the Aussie Dollar fall? The big 4 retail banks in Australian have been steadily raising mortgage rates without any hike from the Reserve Bank of Australia who has kept the official cash rate on hold at 1.5% for more than 2 years. The reason the RBA has kept the official cash rate on hold is that it knows that higher rates at the RBA will be immediately passed on to consumers at a time when wages growth has been non-existent for a decade and while interest rates have been low property prices have risen sharply and so has debt levels. The average Aussie with a mortgage can likely withstand a 0.16% rate increase but they would find it a struggle if another 0.25% or 0.5% was added on top of that from the RBA which would be passed on by the retail banks. The bottom line is traders sold off the Aussie Dollar after NAB’s statement today as they are now pricing in the likelihood that if retail banks are raising rates due to international funding costs going higher there is no way the RBA will raise rates and with China slowing, they may even need to lower them in the coming 12 months. Lower rates in Australia and higher rates o’seas means a lower Aussie Dollar.

Aussie unemployment rate drops to 5%.

The official unemployment rate dropped from 5.1% to 5% in December with 21,600 new jobs created last month. The Aussie did jump higher on the news but the gain could not be sustained post NAB’s interest rate hike statement and the gains were quickly erased. In my view the Aussie unemployment numbers are just as bogus as China’s economic numbers. You would think that official data would be compiled from government departments that would compile numbers from those filing for unemployment benefits etc. Oh no, the numbers are simply derived from survey and you are considered to be employed in Australia if you work, wait for it, one hour a week! Yes, that’s right you are considered to be game fully employed working just one measly hour a week. The real Australian unemployment rate is over 10%.

Capital Economics says the AUD will soon be closer to 0.60c than 0.70c.

Independent Macroeconomics Research firm Capital Economics released a statement this week suggesting the Aussie Dollar was likely to fall to 0.60c against the US Dollar in the next 12 months. It says the local currency could see a low of 0.60c before 2020 and suggested the RBA would be forced to put their official interest rate down to 1% due to the weakening housing market. It also said that lower commodity prices and a slowing China would also drag the Aussie Dollar down.

After 34 days the market is finally starting to take notice of the US Government shut down.

The financial markets after 34 days are starting to count some numbers on how significant the US Government shut down really is and what damage could be done if it drags on into a 5th and 6th week. Trump has cancelled his State of the Union address and each day this saga drags on the probability is the market will take a more and more dim view of the political and economic uncertainty.

European Central Bank to report later this evening.

The European Central Bank will leave its cash rate on hold at 0% Thursday and is likely to give a reasonably dovish statement about Euro Area growth for 2019, which is already well priced into the Euro. The Euro will move sharply if Mario Draghi and the ECB statement deviates from what the market expects. Traders have already priced in lower growth and inflation for the Euro Area but will be eager to hear if Draghi wants to put a more positive spin on things since quitting the money printing program in December. The ECB is desperate to raise rates but is hamstrung by low inflation that needs to pick up before a rate increase. I expect the Euro to perform well in 2019 as traders have already priced in the expectation that the US Fed won’t raise rates in the first half of 2019 and if the ECB gives off some positive signs on when it would like to raise rates the Euro is going to rise. If Draghi is downbeat about the Euro Area in the statement today then I would expect to see the Euro lower post his press conference.

Bank of Japan keeps rates steady as expected.

The BOJ kept its official interest rate steady on Monday at -0.10% and made no changes to its current stimulus program. The BOJ actually downgraded its inflation outlook saying slowing global growth and trade tensions would impact the worlds 3rd largest economy.

Are you seeing a continued trend within this report?

An increasing number of Central Banks, investment banks, hedge funds, leading economists, world leaders, the International Monetary Fund and some of the biggest money managers in the world are all suggesting we are heading into a period of slowing global growth. That is nothing to be concerned about unless you have one thing. Huge amounts of debt and you live only weeks in front of the debt collector. Sadly there are millions of those folks in Australia and it is the very reason why I have been saying for 2 years or more we are ultimately headed for a recession and the Aussie Dollar has the potential to see 0.50c in my view if the recession bites hard.

Keep all things simple. Not easy but incredibly effective. AB

 

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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