Author Steve Oram
The Aussie dollar opens lower again this morning, once again suffering at the hands of global economic and political developments. This week, it will be local factors that drive the direction of our dollar with most attention awarded to Tuesday’s RBA Decision and commentary. First up – a quick review of key events from last week.
US Federal Reserve Cuts Rates
The Fed cut rates by 0.25%, joining the chorus of central banks around the world who are doing so to stimulate their economies. The rate cut itself was fully priced in, but markets did not know which way the Fed would lean for future rate cuts. As it turns out, they somewhat disappointed markets by calling the rate cut a “mid-cycle adjustment” rather than the start of a new rate cutting cycle. Rates were cut to hedge against “downside risks”.
Downside Risks – Trump Announces Tariffs
The downside risks that Powell warned about, have a lot to do with the trade war between the US & China. The trade war was stepped up a notch early on Friday morning, when President Trump announced tariffs of 10% on China’s remaining $300 billion of exports to the United States.
Both events were particularly negative for the AUD/USD. We can now expect US interest rates to be higher than previously expected (as the Fed are not planning to aggressively cut rates as many suggested). This will fuel demand for the US dollar as their interest rates remain higher than Australian interest rates.
Secondly, the Aussie (and other commodity currencies), perform particularly poorly in times of economic turmoil – which is a side effect of a populist US president who makes major policy announcements on Twitter, against the recommendations of his closest advisers.
The messaging from the Fed also highlighted the importance of US economic data. The first piece was US Non-farm Payrolls, which came in as expected with 164k new jobs, an Unemployment Rate of 3.7%, and Average Earnings beating expectations with a 3.2% annual growth rate. These are all signs that the US economy is doing well and thus undermines the chance of future rate cuts. This was enough to kick the AUD that little bit lower late in the week.
The Week Ahead
The US-China stoush will remain a critical pressure ahead, and traders will look for volatility in key event risk like Japanese and UK GDP aside from the local central bank announcements. Chinese data this week in the form or Trade Balance, PPI & CPI will also no doubt impact the Aussie.
The RBA Cash Rate Decision
The RBA has cut rates already this year and is now expected to cut rates again to 1.00%. A cut to 1.00% will boost the likelihood of a cut from the RBNZ, given so much of their economic performance is dependent on their closest neighbour. This rate cut is close to fully priced in, so the focus will be on what the RBA plans to do in the future – will they indicate another cut to 0.75% is likely?
The RBNZ OCR Decision and Monetary Policy Statement
On Wednesday afternoon the RBNZ will announce their decision on the OCR, Markets have now fully priced in a rate cut of 0.25%, which would take their rate to just 1.25%. This cut is considered a done deal As with the RBA economists are expecting additional cuts to come.
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