Author: Steve Oram
AUD opens down from Friday and is set to face a challenging week that is stacked with economic releases and central bank announcements. The two stand out events this week will be the RBA meeting minutes this morning, with the US Federal Reserve’s Rate Decision following on Thursday. Keep an eye on the RBA this week, who are releasing their most recent meeting minutes, along with a speech from Governor Lowe on Thursday. These events will no doubt echo the themes talked about here.
The weekend move lower was a flight to safety, safe-haven currencies like the USD and JPY do well in times of uncertainty, and this week brings plenty of it. The ‘risk-off’ environment has escalated with tensions in the Strait of Hormuz – with the Trump Administration saying that if Iran closes the Strait, that “it’s not going to be closed for long”.
The Week Ahead – US Federal Reserve
On Thursday morning at 6:00 AM the US Federal Reserve will announce their decision on the Fed Funds Target Rate. Markets are expecting the Fed to keep rates on hold at this meeting. However, expectations are that the bank will confirm their intentions to start a program of rate cuts that could move the rate 1.00% lower over the next 12 months.
For now, chances of a rate cut on Thursday are just 23%, so the big question is if the Fed will confirm the need to begin cutting rates from July. The Fed faced huge criticism from both President Trump and equity markets over their aggressive rate hikes in 2018 – it may look like the Fed is bowing to the pressure, but the reality is that global economic performance is in a slump – and the Fed need to move to stimulate the economy.
So why is the AUD/USD Heading Lower?
Whilst interest rate differentials are in flux with both Aussie and US markets pointing to lower rates, global markets are continuing to show signs of underlying weakness. On a global scale, inflation is almost non-existent, and economic growth isn’t much better.
So, two key things are happening to send the Aussie lower. Firstly, global markets are nervous about growth. There are increasing reports of an impending global recession. The Aussie dollar does not do well in times of global uncertainty. It is fair to say we are tiny in the global scheme of things, and we are geographically isolated.
Furthermore, the Aussie is suffering from our reliance on China. Political tensions with China are bubbling away. This is further compounded by the trade war between the US and China. All in all – the Aussie economic picture is not looking entirely rosy. The trade tensions with China are one of Trump’s largest political footballs and he will inevitably continue to play the game up until the 2020 elections.
Other Events to Watch
There will also be rate decisions from the Bank of Japan and the Bank of England – both worth looking at to gauge the sentiment in global markets. Thursday’s NZ GDP numbers as a precursor to the following Wednesday’s OCR Decision – NZ GDP has been heading lower and this is a key reason for a dovish stance from the RBNZ. Markets are expecting quarter on quarter growth of 0.6%, with year on year growth of 2.4%. Whilst this would still be a slight improvement on last quarters 2.3% annual growth rate, it is far from an ideal level of growth.
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