Investors interested in US bonds
As investors raced into safe assets like US government bonds, the decrease matched a small decline in the New Zealand dollar, which is also closely linked with growth, as well as declines in US and European sharemarkets. Only a few weeks earlier, the main concern on financial markets was that unprecedented levels of fiscal and monetary stimulus would cause inflation to spiral out of control.
Now, markets are expressing increasing concern about the possibility that a reduction in stimulus from the likes of the US Federal Reserve could hinder the comeback before the global economy has fully recovered from the pandemic.
Reason for drop Aussie dollar
The Australian dollar has dropped in value just days after the Reserve Bank of Australia announced a plan to gradually withdraw quantitative easing and stop buying yield curve control bonds in April 2024 rather than continuing it to the next issuance. The initiatives are the first, cautious steps towards reducing the record levels of monetary stimulus, which also include $200 billion in bond purchases to underpin rates and lower borrowing costs across the economy in order to stimulate development.
Spite of low in stimulus, the July meeting was dovish overall, as the RBA reiterated its expectation of raising interest rates in 2024, while market pricing suggests other central banks may move faster. The Fed’s recent effort to contemplate reducing its massive bond-buying programmes against the backdrop of a chronic COVID-19 threat, with new varieties like the delta strain forcing even fully vaccinated nations like Israel to consider fresh lockdowns, has fueled fears that stimulus may be withdrawn.
Comments on Aussie dollars by Rodrigo Catril, senior FX strategist, NAB
The Australian dollar is extremely susceptible to growth, and there has been a change in focus to growth worries. The RBA’s overall message is that it is dovish in comparison to other central banks. The economy and labour market are strengthening quicker than the RBA anticipated, indicating slowing, but wages growth has not exceeded projections, so no rate hikes are projected until 2024.
Source AFR
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
