USD gains due to tensions with China over Taiwan visit

Tensions between the US and China ramped up a notch in the last 24 hours after it was announced that Nancy Pelosi, the Speaker of the US House of Representatives, is planning to meet Taiwan’s President Tsai Ing-wen tomorrow. She is in the far east visiting Japan, South Korea and Malaysia but the Taiwan visit was a surprise. China has not reacted well, upping military activity in the area and scowling at the Americans. That has sent investors scurrying in search of safety. That, they found in the guise of the US dollar. So, the GBPUSD rate has slipped from its highs to $1.2215 this morning and the EURUSD rate is also down at $1.0235. We don’t have any hard data from the US today. Yesterday’s US purchasing managers indices were predictably weak. We will have some speakers from the Federal Reserve though, so look out for that.

RBA hikes as expected

Not for nearly 30 years have we seen the Reserve Bank of Australia hike their base rate at such a pace. The RBA added 50 basis points to their official cash rate overnight; their 4th hike in a row, bringing the rate up to 1.85% in an attempt to thwart inflation. I must admit I struggle with the strategy of punishing consumers who are not the cause of inflation which is largely driven by external factors. The RBA believes inflation will peak at 7.75%. Contrary to normal action, the Australian dollar weakened immediately after the announcement. It is worth noting that the building permits data, also released overnight, was a little better than expected, showing a 0.7% decline against a market forecast of minus 5%. The GBPAUD rate is up to AUD 1.7585 right now, having peaked just above AUD 1.76 an hour ago. Part of this Aussie dollar weakness may stem from clear risk-averse moves in the investment markets which saw the US dollar strengthen and commodity-related currencies slip.

NZD weaker alongside AUD

The New Zealand dollar emulated its Australian counterpart in the early hours of this morning. The GBPNZD rate is up a cent to NZD 1.9415 this morning. Traders are also preparing for New Zealand’s employment data which will be released late this evening (UK time). Most believe the unemployment rate will edge lower to 3.1% and the participation rate will edge higher to 71%. That puts pressure on wage-price inflation and could cause the reserve Bank of New Zealand to keep the rate hike plans in place. So, I am surprised the NZD is weaker. This may prove to be a short-term window of opportunity for NZD buyers. As with the AUD, a ‘risk off’ sentiment pervading the markets will have had a negative effect on the value of the Kiwi dollar.

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