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US President-elect Donald Trump has demanded Panama reduce fees on the Panama Canal or return it to US control, accusing Panama of charging excessive rates to use the Central American passage, per Reuters.
Trump also said he would not allow the canal to fall into the "wrong hands," citing possible Chinese control of the passage. However, Panama's President Mulino said on Sunday that Panama's independence was non-negotiable and that China had no control over the canal's administration. He also defended Panama's passage charges, claiming they were not established "on a whim”.
Market reaction
At the time of writing, the US Dollar Index (DXY) was unchanged on the day to trade at 107.80.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
The European Central Bank (ECB) Governing Council member Boris Vujcic said on Saturday that the central bank will go on lowering borrowing costs in 2025, per Bloomberg.
Key quotes
“The direction is clear, it’s the continuation of the direction from 2024, and that is the further reduction of interest rates.”
“That will be determined by data, primarily the inflation rate, will it decelerate, according to our projections, and we will see the impact of the transmission of the monetary policy, and our projections.”
“If there is a trade war, that will be bad for growth in Europe and in the rest of the world,” Vujcic said, adding that trade wars typically fan prices. “We hope we won’t see a trade war, that won’t be good for anyone.”
Market reaction
At the press time, the EUR/USD pair was up 0.03% on the day to trade at 1.0430.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
- AUD/USD flatlines near 0.6250 in Monday’s early Asian session.
- The US PCE inflation reports came in softer than the expectations in November, weighing on the USD.
- The rising bets for RBA rate cuts next year could undermine the Aussie.
The AUD/USD pair trades on a flat note around 0.6250 during the early Asian session on Monday. Traders brace for the Reserve Bank of Australia (RBA) Minutes released on Monday for some insight into the interest rate outlook.
The softer-than-expected US Personal Consumption Expenditures (PCE) Price Index report dragged the US dollar (USD) lower on Friday. Data released by the US Bureau of Economic Analysis (BEA) on Friday showed that headline PCE rose 2.4% YoY in November versus 2.3% prior, below the market consensus of 2.5%.
Meanwhile, the Core PCE, which excludes volatile food and energy prices, climbed 2.8% in the same period, matching October's reading but below the estimation of 2.9%. The core PCE Price Index increased by 0.1% MoM in November. The report comes just two days after the US Federal Reserve (Fed) lowered its benchmark interest rate by 25 basis points (bps) to a target range of 4.25%-4.50%.
On the other hand, the RBA kept the Official Cash Rate (OCR) at 4.35% earlier in December. The rate has not changed since November last year. RBA governor Michele Bullock emphasized the ongoing strength in the jobs market as a reason why the RBA has lagged comparable nations in beginning its monetary easing cycle. However, the rising expectation that the Australian central bank will cut the interest rate in February could weigh on the Aussie.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
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