Aussie dollar falls for a

twelfth consecutive day

Rahil Andleeb
34 A
What is the News ??
Aug 05, 23:50 GMT

● The Australian dollar is weaker this morning when valued against the greenback, reaching a 24-hour low of 0.6746,
falling for a twelfth consecutive day.
● The Aussie dollar came under pressure in early trade as China's central bank revealed it was devaluing the nation's
currency, breaking the 7 yuan to the US dollar mark for the first time.
● This comes as there are growing fears the US-China trade battle is now a full-blown currency war that will hurt the
global economy.
● On the data front yesterday in China we saw the release of Chinese Caixin Services PMI, came in at 51.6 for July,
missing the expected 52.9 and down from the preceding month's reading of 52.00.
● As a result of China’s decision to let the yuan fall against the dollar, demand for dollars surged around the globe,
including in Australia, where investors bought into the safety of the greenback at the expense of the AUD.

The Purchasing Managers' Index (PMI) is an index of the prevailing direction of economic trends in the manufacturing and service sectors. It consists of a diffusion index that
summarizes whether market conditions, as viewed by purchasing managers, are expanding, staying the same, or contracting.
Story in Numbers
Story in Numbers
Story in Numbers

Source:https://www.sbs.com.au/news/australia-s-trade-explained-top-imports-exports-and-trading-partners
Recap of Few Concepts
Interest rate,Money Supply, Inflation, Currency Value
● Interest rates, and the associated inflation rate have a negative relationship with each other. When interest rates rise there is a lower
incentive to borrow money and a higher incentive to save.
● In general, as interest rates are reduced, more people are able to borrow more money. The result is that consumers have more money to
spend, causing the economy to grow and inflation to increase. The opposite holds true for rising interest rates.
● The relationship between interest rates and money supply is all else being equal, a larger money supply lowers market interest rates.
Conversely, smaller money supplies tend to raise market interest rates.
● Increasing the money supply faster than the growth in real output will cause inflation. The reason is that there is more money chasing the
same number of goods. Therefore, the increase in monetary demand causes firms to put up prices.
● Unlike interest rate and inflation, the effect interest rates have on exchange rates are positive. As interest rates rise, the exchange rate falls,
and vice versa. When interest rate in a country rises it causes it creates a higher demand for the currency of that country.
● Inflation can lead to higher input costs for export which makes a nation's exports less competitive in global markets, which widens the trade
deficit and causes the currency to depreciate.
Key Movers
● On Monday we saw a U.S. dollar sell-off continue as risk-off took over financial markets after
China allowed the yuan to breach the 7 per dollar level for the first time in 11 years, a level last
seen in 2008, in move seen as a direct response to U.S. President Donald Trump’s escalation of
their trade conflict through more tariffs.
● The move opens up a new front that could dramatically raise volatility in the forex market after a
prolonged period of calm. On the data front yesterday US Market indexes came in better-than-
anticipated, but the official ISM Non-Manufacturing PMI dropped in July to 53.7 from 55.1 and
below the expected 55.5. The backdrop in services output further weighed on the greenback.

The Non-Manufacturing ISM Report on Business is a purchasing survey of the United States service economy, published by the Institute for Supply Management since June 1998.
Its results are a popular economic indicator and forecaster. The survey is currently written by Anthony Nieves, C.P.M., CFPM, the Senior Vice President of Supply Management for
Hilton Hotels Corporation.
Its primary index is the Non-Manufacturing Business Activity Index.
China Devaluing its Currency
● Devaluation is the deliberate downward adjustment of the value of a country's money relative to another currency,
group of currencies, or currency standard. Countries that have a fixed exchange rate or semi-fixed exchange rate
use this monetary policy tool.
● One reason a country may devalue its currency is to combat a trade imbalance. Devaluation reduces the cost of a
country's exports, rendering them more competitive in the global market, which in turn, increases the cost of
imports, so domestic consumers are less likely to purchase them, further strengthening domestic
businesses. Because exports increase and imports decrease, it favors a better balance of payments by shrinking
trade deficits. That means a country that devalues its currency can reduce its deficit because of the strong
demand for cheaper exports.
● On August 5, 2019, the People's Bank of China set the yuan’s daily reference rate below 7 per dollar for the first time
in over a decade. This, in response to new tariffs of 10% on $300 billion worth of Chinese imports imposed by the
Trump administration, set to go into effect September 1st, 2019.
● After a decade of a steady appreciation against the US dollar, investors had become accustomed to the stability and
growing strength of the yuan. Thus, while a somewhat insignificant change for Forex markets, the drop – which
amounted to 4% over the subsequent two days – rattled investors.
Impact of China Devaluing Its
Currency and Australia-China Trade
Statistics
● China's devaluations could be problematic for the global economy. Given that China is the world’s largest
exporter and its second-largest economy, any change that such a large entity makes to the macroeconomic
landscape has significant repercussions.
● With Chinese goods becoming cheaper, many small- to medium-sized export-driven economies could see
reduced trade revenues. If these nations are debt-ridden and have a heavy dependence on exports, their
economies could suffer. For instance, Vietnam, Bangladesh, and Indonesia greatly rely on their footwear
and textile exports. These countries could suffer if China's devaluations make its goods cheaper in the
global marketplace.

Important Stats
● Australia is China's sixth largest trading partner;
● it is China's fifth biggest supplier of imports and its tenth biggest customer for exports.
● Twenty-five per cent of Australia's manufactured imports come from China;
● 13% of its exports are thermal coal to China.
Reasons for Fall in AUS Dollar
Interest rates pushing the dollar down

The first reason is that Australian interest rates have been falling.In a direct way that reduces the relative attraction of investing in Australia versus
other countries.If you can get a risk-free return of 3% in one country and 2% in another, the higher interest rate is more desirable and all other things
being equal, it will enjoy more foreign investment and a stronger currency.

Slowing growth cuts the currency

Result of a string of poor results prompted concerns about global growth, including poor
manufacturing results in China, Australia’s biggest trading partner.
Major Reasons for Fall in AUS Dollar

Iron ore boom finally decouples from falling dollar

● While iron ore has been trading around five-year highs above US$110 a tonne, the dollar has been
falling.
● Many forecasters are looking past the current tight iron ore market in China to falling Chinese steel
mill margins which eventually will need to be improved by either lower raw material prices or even
higher steel prices.
● Out of those two possibilities, lower iron ore prices seem the most likely, with some iron ore bears
seeing the price falling to US$80/t by the end of this year.
Why-a-weaker-yuan-forces-the-fed-to-
cut-rates
● Analysts say the stronger dollar puts the U.S. at a disadvantage on the world stage because it makes American-made goods and services
more expensive relative to other world currencies.
● President Trump on Thursday put renewed pressure on the Federal Reserve to cut interest rates, arguing the strength of the U.S. dollar is
hurting American manufacturers.
● In a series of tweets, Trump accused the Fed of hindering U.S. exports by keeping interest rates relatively high compared with other
economic powers. He suggested the central bank should weaken the dollar by lowering interest rates.
● “As your President, one would think that I would be thrilled with our very strong dollar. I am not! The Fed’s high interest rate level, in
comparison to other countries, is keeping the dollar high, making it more difficult for our great manufacturers like Caterpillar, Boeing, John
Deere, our car companies, & others, to compete on a level playing field,” Trump said in the series of tweets.
● “With substantial Fed Cuts,” Trump added, “the dollar will make it possible for our companies to win against any competition.”
Why does USD React to Australian
Economy
The main reason is interest rates.
If interest rates in Australia are higher than the rest of the world, then investors in London and New York will
want to put money here to get the best returns. To invest in Australia, they need Aussie dollars. When they go
and buy Australian dollars, the extra demand forces up the price of an Australian dollar. (The exchange rate is
just the most recent price paid for an Aussie dollar in, say, US dollars.)
At the moment, fewer people are eager to buy our dollar. Our interest rates are low and staying low. But interest
rates keep rising in America as their economy booms. So smart investors are moving their money stateside in
search of better returns. They’re selling Aussie dollars for US dollars, pushing our exchange rate down.
Fed Impact of Rate Cuts
● The Federal Reserve System is the central bank of the United States and arguably the most powerful financial institution in the world.
● If the Fed lowers the federal funds rate, then banks can borrow money for less. In turn, they can lower the interest rates they charge to
individual borrowers, making their loans more attractive and competitive. If an individual was thinking about buying a home or a car, and the
interest rates suddenly go down, he or she might decide to take out a loan and spend, spend, spend! The more consumers spend, the more
the economy grows.
● The RBA is set to leave interest rates unchanged when it announces its decision on August 6th at 4:30 GMT. However, the bank may push
the Aussie down by warning that the global slowdown may result in rate cuts down the road. Other scenarios are leaving the statement
unchanged and boosting AUD/USD, and another one that cannot be ruled out is surprising with a rate cut.
● Federal Reserve Chair Jerome Powell, who last week cut U.S. interest rates as an insurance policy against the effects of “simmering” trade
tensions, may need to buy more coverage after the United States late on Monday designated China a currency manipulator.
● The gap between our interest rates and America’s will have a big impact on the currency. It’s what’s known as the spread.
● The wider it gets – in America’s favour – the weaker our dollar will become. That’s because investment funds looking for a decent return will
scarper offshore in search of higher yields.
Role of Australian Reserve Bank in
this Crisis
●
●
RBA Keeps Rate-Cut on Cards to Shield Aussie From Global Easing
Australia’s central bank chief Philip Lowe is leaving open the door to further interest-rate cuts in order to prevent a
wave of global easing from neutralizing his back-to-back reductions and boosting the currency.
● Australia’s central bank held its key policy rate at its current record low on Tuesday following two consecutive cuts,
but suggested more easing measures could be needed amid a slowing economy.
● The Reserve Bank of Australia left its cash rate unchanged at 1 per cent following its latest monetary policy meeting
● “It is reasonable to expect that an extended period of low interest rates will be required in Australia to make progress
in reducing unemployment and achieve more assured progress towards the inflation target,” Philip Lowe, RBA
governor, said in a statement.
● Australia’s economy is growing at its slowest pace in almost a decade, raising concerns over how long the country
can sustain its record run of almost 28 years without recession.
● President Donald Trump’s decision to impose additional tariffs on China last week suggests the Federal Reserve is
likely to have to cut rates further to protect the U.S. economy, ramping up pressure on Lowe to follow suit.
 THANK
YOU
Recovery Plan
https://www.abc.net.au/news/2019-06-10/jobs-are-the-only-thing-keeping-australia-from-a-recession/11184636

https://www.bloomberg.com/news/articles/2019-08-04/rba-keeps-rate-cut-on-cards-to-shield-aussie-from-global-easing