Australian Dollar: AUD USD Exchange Rates Prove Bearish Before Trump Tax Legislation Vote

The Australian Dollar to US Dollar (AUD/USD) exchange rate spent Thursday trading lower as investors focused on US tax reform legislation.

AUD Exchange Rates Buoyed by Positive Slide in Unemployment

According to the Australian Bureau of Statistics (OBS) Australia’s unemployment dropped to its lowest level in over four and a half years in October, hitting the seasonally adjusted rate of 5.4% – down from the previous reading and forecast of 5.5%.

However, this dip resulted primary from a drop in the labour market participation rate, which contracted from 65.2% to 65.1%.

Ultimately, this puts Australia’s unemployment levels even closer to the range considered to be ‘full employment’ – a promising prospect for Australia’s economy, though some have suggested that it will not lead to higher wages in this instance.

AMP Capital Senior Economist Diana Mousina stated as much, asserting:

‘This low unemployment rate is not leading to higher wages because there is still some excess capacity in the labour market, with underemployment still elevated’.

Beyond this, there remains the issue that the Reserve Bank of Australia (RBA) is currently regarded as pursuing a dovish outlook for monetary policy, with policymakers cautious in the wake of poor wage growth, retail spending figures and consumer confidence readings.

Mousina continued:

‘We think that the weakness in the recent run of data is a clear signal that rate hikes are firmly off the table for now. We think that the RBA will have room to raise the cash rate in late 2018 or early 2019, the low inflation backdrop, a slowing housing market and concerns around the consumer, the risk now is with an RBA rate cut’.

Whilst the unemployment readings were positive, their influence over AUD USD remained minimal, with markets hesitant to buy too far into the ‘Aussie’ Dollar before tonight’s vote on the critical US tax reform legislation.

Trump Tax Vote Imminent, AUD USD Exchange Rate Bearish

US President Donald Trump’s highly anticipated tax reform proposal will be voted upon today, with various GOP leaders remaining confident that the legislation will garner the votes it needs to be successful at the House of Representatives.

Nonetheless, investors are concerned that the legislation could end up suffering a similar fate to the failed Obama-care reform that occurred earlier in the year, an eventuality that would have dire implications for the near-term value of the US Dollar.

If the vote is fruitful, it would be a successful first step towards achieving reform, a prospect that could result in increased economic growth for the US.

Kevin Brady, Chairman of the Tax-Writing House Ways and Means Committee, shared this attitude on the bill, stating:

‘The American people have waited years for a fair, simple and competitive tax code. Right now, in this moment, we stand on the doorstep of delivering’.

In other news, the US Dollar has been slightly encumbered by a drop in US import and export prices, with year-on-year exports in October sliding to 2.7%, down from the previous 2.9%, and annual imports printing at 2.5%, down from the previous period’s 2.7%.

These results did not have a massive effect on the AUD USD exchange rate, however, with markets remain predominantly concerned with the upcoming vote.

AUD USD Outlook Negative on Fed Rate Hike Prospects

The near-term outlook for the AUD USD exchange rate remains predominantly negative, with markets expecting the ‘Greenback’ to increase in appeal as we approach the Federal Reserve’s December monetary policy meeting.

Investors are almost entirely pricing in a third and final rate hike in 2017 at said meeting, with the speedy growth of the US economy (particularly the recent US inflation figure excluding food and energy) deemed fertile soil for tighter monetary policy.

Because of this outlook, the US Fed is currently regarded as far more hawkish than the RBA, a perspective that will likely position the US Dollar as the more attractive option for investors in the months ahead.

Adam Solomon

Adam joined the team at TorFX soon after graduating from University in 2005 with a degree in Journalism. Since then Adam has advanced to become both Head of Trading and Head of Treasury. His keen interest in the currency market and knowledge of what drives exchange rates makes him perfectly positioned to produce regular market updates focused on the movements of the major currencies.

Contact Adam Solomon