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#1 18-08-2020 14:41:40

johnedward
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From: Paris - France
Registered: 21-12-2009
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AUD, RBA, and the Fed: How should we interpret currency fluctuations?

AUD, RBA, and the Fed How should we interpret the fluctuation of a currency?


The AUD is one of the currencies that has best withstood the current virus situation. After the initial shock in Q1, when the world sought the safety of the USD, the Aussie dollar also began to rise steadily.

But it appreciated not only against the USD, but also against the EUR, NZD and JPY. Did the RBA (Reserve Bank of Australia) do anything special?

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In times of crisis, the focus is on the Fed.

Traders should always be flexible when considering a currency's potential. On the one hand, local economic activity prevails most of the time. On the other hand, there is also monetary policy. To this end, central banks provide sufficient information and research for a good understanding of the internal workings.

On the other hand, macroeconomic forces often overshadow local policy actions. Thus, a currency does not rise or fall just because the central bank changes its monetary policy outlook. The right way to interpret this is to compare the central bank's actions with those of other central banks of similar importance. The difference between their actions points to a better interpretation of a currency's outlook.

The RBA sets the interest rate, the liquidity rate, nearly a dozen times a year. Every first Tuesday of each month, except the first month of the year, it meets and reviews the nation's economic performance. It also did so last August, and two weeks later yesterday, the minutes of the monetary policy meeting were released.

However, the rising trend of the AUD has nothing to do with the RBA's actions. In fact, the RBA has been easing throughout the time the local dollar has been appreciating. In other words, investors simply don't expect the market to move on anything the RBA does during the crisis, with the focus turning to the Fed.

As a leading central bank, the Fed leads the way for monetary policy actions by other central banks. This is especially true when all countries are facing the same problems - fewer jobs, companies reluctant to spend, increasing bankruptcies, high personal savings rates, etc. - and the Fed is not the only central bank to take the lead.

The crisis generated by the virus differs from the one 12 years ago. At that time, the Australian economy, for example, was not affected. Local monetary policy prevailed. But today, currency investors have to look at the bigger picture.

Returning to the strength of the local dollar, the negative impact of a strong currency on an economy has been offset by rising commodity prices. If commodity prices are reversing, the situation for the Aussie dollar will also reverse.

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