Today’s Key Market Drivers – 8th November 2017


When will the Aussie Dollar vs the US Dollar be 0.50c again?

The RBA as expected kept the official cash rate on hold at 1.5% when it released its November policy statement on Tuesday and confirmed to the market interest rates are not about to rise anytime soon. Hence the Aussie Dollar is lower against a basket of currencies such as the Pound, US Dollar, Yen and Euro. The AUD v JPY TIA trade was filled post the RBA decision yesterday and remains in the market short along with the NZD v JPY that was filled on Monday.

The Euro continued to decline against the US Dollar after weaker than expected Industrial Production numbers out of Germany and traders continue to price in higher interest rates at the US Fed and indefinite artificial money printing and zero percent interest rates at the ECB. Traders are currently pricing in the probability the US Fed hikes rates again in December and another two more times in 2018. This would put the official cash rate at the US Federal Reserve at 2% by the end of 2018, a full 0.50% higher than the RBA assuming they don’t raise rates. The US Fed would also be 1.5% higher than the Bank of England and more than 2% higher than the European Central Bank and Bank of Japan who have official interest rates in the negative.

Do you remember when the Aussie Dollar reached 1.10c against the US Dollar in the first week of July 2011? Why did the Aussie Dollar rise so high? The answer is simple. The official interest rate at the RBA was 4.75% and the official interest rate at the US Fed was 0.25%. The difference was a full 4.5% higher in favour of the RBA. Hundreds of billions of dollars came flooding for the AUD for a guaranteed 4.75% return on investment. Fast forward 6 years and the difference between the RBA’s and US Fed’s interest rates are about to reverse with the US Fed soon to have a higher interest rate than Australia. History shows when this interest rate divergence happens the currency with the lower interest rate loses and this is exactly the reason why I am betting the Aussie Dollar continues to fall lower against the US Dollar in the coming 6 to 9 months.

 

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 key-note 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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