- Australian Dollar is worst performing major currency this week

- Bushfires raise expectations for RBA rate cut

- Disappointing jobs data catches market attention

Image © Adobe Images

- Pound-to-Australian Dollar spot exchange rate: 1.9103, up 0.01% on yesterday

- Indicative snapshot of rates on offer at your bank for money transfers: 1.8431-1.8564

- Indicative shapshot of rates on offer at independent money transfer specialists: 1.89-1.8930 >>Get a quote

The Australian Dollar remains under pressure as foreign exchange markets bet that the Reserve Bank of Australia (RBA) is poised to cut interest rates over coming months, owing to the severity of the country's ongoing wildfires and a looming slowdown in the jobs market.

"Australia’s dollar tumbled more than 1% to mid-December lows, as the country’s deadly fires strengthened the case for the Reserve Bank to cut interest rates to fresh lows as soon as February," says Joe Manimbo, a foreign exchange analyst with Western Union.

The rule of thumb in currency markets is that a currency will decline when its issuing central bank embarks on an interest rate cutting cycle.

The Pound-to-Australian Dollar exchange rate shot above 1.91 on the developments, having been as low as 1.88 earlier this week. The Australian Dollar-to-U.S. Dollar exchange rate is quoted at 0.6860, having been as high as 0.9648 earlier in the week.

"The Australian dollar is getting pummelled," says Erik Bregar, Head of FX Strategy at Exchange Bank of Canada. "Market chatter continues to swirl that the RBA will ease interest rates on February 4th to help the economy cope with the natural disaster."

Above: The Australian Dollar's performance against other major currencies over the course of the past week.

Authorities say almost 2,000 houses have been destroyed in Australia's months-long bushfire crisis, with at least 25 people and millions of animals having died since September.

Prime Minister Scott Morrison expects the fires to continue for months and has promised to set up a fund of a minimum of AUD 2BN over the coming two years which is intended to cushion the effects of the fires.

"In view of the scope of the destruction, Australia’s GDP is likely to be significantly lower in Q4 as regional economic activity, parts of the mining sector and tourism are likely to have been affected," says Antje Praefcke, a strategist with Commerzbank.

Praefcke says if the RBA were to worry about the effects on economic activity caused by the bushfires it may cut its key rate again, "which means that the rate meeting on 4th February will be interesting. In the meantime the AUD is under pressure."

* Time to move your money? | Get industry-leading exchange rates and maximise your currency transfer potential with Global Reach. Speaking to a currency specialist will also help you to capitalise on positive market shifts while protecting against risk. Find out more here. * Advertisement

But it's the Jobs Data that is the Real Worry for AUD

A drop of 6.7% month-on-month in job advertisements measured by ANZ in December caught market attention.

Typically this data is ignored by the market, but the figures only served to stoke fears "that the worsening wildfire situation may cause the official Australian employment data to start falling off a cliff as well," says Bregar.

The 6.7% m/m drop in December took ANZ Job Ads down to its lowest level since April 2016. "In the final two weeks of December, the number of job ads declined by more than we would expect for that time of the year, suggesting that the escalating bushfire crises had an impact," says Catherine Birch, ANZ Senior Economist.

Brent Donnelly, a currency trader with HSBC in New York says that those looking to trade the Aussie Dollar on the bushfire will be disappointed: "Anyone selling AUD on the wildfires... is most likely to be disappointed because natural disasters are usually net GDP neutral and untradable."

"Even if the disaster is a 0.2% or 0.3% drag on GDP now, there is a positive rebuild impact later and since markets are forward discounting mechanisms, the currency impact should be zero," adds Donnelly.

Instead, it is the jobs numbers that are the real story to traders such as Donnelly.

"Oz was a favourite expression of the global reflation theme and there has been a realization (after last night’s terrible job ads data) that last month’s strong AU jobs number was probably an outlier; the forward-looking stuff still looks weak," says Donnelly.

Disappointed jobs numbers and wildfires do however combine to raise expectations for a February interest rate cut at the RBA.

The shift in expectations for a RBA interest rate cut mark an about turn for a market that had been increasingly convinced that the RBA might now be done with interest rate cuts.

The Australian Dollar index - a broad measure of Australian Dollar performance - rose 2.2% in December as the currency gained support from expectations for a U.S.-China trade deal.

However, the RBA also had a role to play in the ascent: the statement from the RBA's December meeting underpinned AUD early in the month after the RBA left the cash rate at 0.75% but pointed out the downside risks to the global economy have “lessened recently”.

This was seen as a signal to markets that the RBA was willing to step back from cutting interest rates in order to gauge the effectiveness of the cuts already delivered in 2019.

So within a matter of weeks market expectations regarding RBA policy have flipped from being supportive of the Aussie Dollar, to being a headwind.

Time to move your money? The Global Reach Best Exchange Rate Guarantee offers you competitive rates and maximises your currency transfer. They offer great rates, tailored transfers, and market insight to help you choose the best times for you to trade. Speaking to a currency specialist helps you to capitalise on positive market shifts and make the most of your money. Find out more here.

* Advertisement