Reserve Bank of Australia (RBA) Deputy Governor Andrew Hauser said early Tuesday that the measures of global trade uncertainty are at 50-year highs. Hauser added that the ambiguity from US President Donald Trump’s tariffs could see companies and households “batten down the hatches” and postpone planning and investment, leading to a hit to the economy.
Key quotes
Measures of global trade uncertainty are at 50-year highs.
Risk for Australia would be if US tariffs triggered a global trade war.
Markets realising that trade uncertainty could see firms and households batten down the hatches.
Such ‘watchful waiting’ could prove economically damaging in aggregate.
Possibility of such an effect played a part in the RBA’s February rate cut.
February rate cut reduced the risks of inflation undershooting the 2.5% target.
The board does not currently share market confidence that a sequence of further rate cuts will be required.
Progress on inflation has been good, but it is too soon to declare victory.
Judge that labour market conditions will remain relatively tight over the forecast period.
Recognise risk we have overestimated tightness of labour market.
Sees productivity as a key factor affecting CPI and the economy.
Will closely watch trade war’s impact on CPI.
If inflation accelerates due to trade war, RBA will take action.
Board members provide deep judgment and knowledge.
Inflation declines, but there are some remaining upside risks.
An inflation increase linked to trade war, RBA prepared to respond.
Inflation slowing, with some risks easing.
Unusual volatility observed in stocks, crypto, futures, and other markets.
Will closely monitor trade war effects on CPI.
Board members contribute significant expertise and experience.
Rate-cut decision was not evenly split but also not heavily one-sided.
RBA aware of potential labour market overheating.
Market reaction
At the time of writing, AUD/USD is holding higher ground near 0.6265, adding 0.27% on the day.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
