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“Doom and Gloom priced in” AUD continues to drift

Published May 31, 2019

Author: Steve Oram

The Aussie kept calm, now spending 4 sessions within a tight range, even after poor economic data on Thursday. Possibly because the market had priced in so much bad news in already on expectations of steep rate cuts. Current futures markets have at least two cuts in interest rates this year from the Reserve Bank of Australia (RBA)  already priced in.

Australia’s data yesterday showed business investment fell 1.7% in the March quarter, when analysts had hoped for a rise of 0.5%, though firms did revise up their future spending plans.The miss only added to expectations figures for gross domestic product (GDP), due next week, would also be soft. Annual growth may well have slowed to 1.8% or less, the worst performance since the global financial crisis. The outlook was also uncertain with approvals to build new homes falling 4.3% in April, heralding marked weakness in housing construction ahead.

“Anything short of clear signals for aggressive easing from the RBA could even trigger a rebound.”  said Marios Hadjikyriacos, an investment analyst at forex broker MX.

ANZ and Westpac believe the Aussie’s slide isn’t over yet. ANZ says “the domestic and external stories are pointing to more substantial weakness for the AUD in 2019”. It sees the AUD/USD finishing the year at .6500. On the back of three predicted 25 basis point rate cuts from the RBA this year, Westpac sees the AUD/USD sliding to .6600 over the same time frame. JP Morgan have gone a step further to forecast the RBA to cut rates 4 times by mid 2020.

BUT lets not get carried away says noted Australia RBA watcher Terry McCrann, who has come out against the clamour for rampant cuts in an article in the press  – “Four RBA interest rate cuts? Don’t be so sure” Mc Crann is not convinced on the 4 cuts call, saying “the absolutely basic thing to understand is that next week’s cut is the only cut the RBA has locked in.” adding “it might broadly think it probably will deliver a second cut” but expects they will review how the market reacts to the first given that the recent election ‘shock’ has created a series of positives for the economy.

Overnight The US first quarter GDP grew by 3.1 percent, slightly lower than the initial 3.2% projection from the Bureau of Economic Analysis, the Commerce department reported Thursday. The initial market reaction to the reading was relatively muted as the US dollar Index was trading flat on the day above 98 levels.

The US jobs market continued to point to ongoing tightness as Initial claims for state unemployment benefits rose 3,000 to a seasonally adjusted 215,000 for the week ended May 25, the Labour Department said on Thursday.

Looking ahead, we have Chinese Manufacturing data released this morning, followed by U.S consumption data overnight.  The data out of China will be closely watched in Australia and has the potential to move the currency if we see a surprise number.  Next week sees the much anticipated RBA decision on interest rates on Tuesday, as well as a host of U.S economic announcements including non-farm payrolls next Friday.