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18th June 2019
It’s been another subdued start to the week for the Aussie dollar as a lack of meaningful data on the domestic front has investors sitting on the sidelines for the moment. After last week’s mixed results on the consumer/business confidence front and soft employment numbers currency traders are waiting on the release of the RBA minutes from this month’s meeting and RBA Governor, Philip Lowe’s speech on the Labour Market on Thursday for clues as to their next move. With the RBA repeatedly flagging the need to reduce unemployment and return inflation to target levels, Lowe’s current sentiment on the state of both will be a significant driver of short-term AUD performance. At the moment, 1 AUD will buy you:
0.6667 US dollars
71.1594 Japanese yen
0.5859 euros
0.5257 Great British pound
0.8646 Canadian dollars
1.0189 New Zealand dollars
0.8854 Singapore dollars
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Mortgage arrears rise, upping pressure on the RBA to cut rates for a second time
With a lack of major economic data on the domestic front so far this week, the AUD has performed quite weakly against the USD as stronger than anticipated US data and growing concern on the impact of trade tensions on the Chinese economy weighed on investor’s appetite for risk. Australia’s economy and currency are tightly linked to commodity prices and volatility, and AUD buyers have been disappointed to see increased trade tensions between the US and China. Prospects of reaching an economically viable solution when the leaders of both countries meet at the G20 Summit are also dwindling with both leaders keeping up the harsh rhetoric we’ve seen over the recent months.
Further drawing the attention of AUD traders was the release by ratings agency, Moody’s, showing that Australian mortgage delinquencies have risen to levels not seen in almost a decade. According to Jonathan Keans, the RBA’s head of Financial Stability, weak income growth, housing price falls, rising unemployment and recent weaker lending standards have contributed to the rise in home loan arrears.
With this being the case, it is expected that the RBA will signal the need to continue with interest rate easing measures in a bid to get unemployment back below 4.5% and ease some pressure on struggling households. Markets are expecting this to result in the cash rate falling to 1% sooner rather than later. While initial expectations for the next cut were August, it could very well be brought forward to July. Expect more downward pressure on the AUD if this is the case.
It’s also a big week for the Federal Reserve in the US and the Bank of England as they are scheduled to meet and release monetary policy decisions that could have an effect on AUD performance against both currencies.
Conservatives clash on Brexit strategy, keeping the GBP under pressure. But where’s Boris?
While the AUD struggled against the USD, AUD/GBP performance has continued to recover as the Brexit drama continues to weigh on investor sentiment towards GBP. While the Bank of England is expected to leave monetary policy on hold on Thursday while the Brexit sideshow remains in full swing, it is not expected to put much downward pressure on the AUD.
Conservative Party leadership contenders held their first televised debate over the weekend with the notable absence of frontrunner, Boris Johnson. Unsurprisingly, no candidate pulled a Brexit solution rabbit out of the hat, and they mostly bickered over what course to take.
“Where’s Boris?” was the question on Foreign Secretary Jeremy Hunt’s lips as the top Conservative Party leadership contender was chastised for bailing on the debate. Who could blame him, though; it’s probably best to say less in these kinds of situations if you don’t have any viable solutions to the UK’s biggest immediate problem.
It doesn’t look like the leadership battle, nor the Brexit situation will be sorted any time soon and as long as it is ongoing, the performance of the GBP is likely to remain flat at best. GBP investors will be keeping a close eye on the next round of voting this week, with the pound likely to remain volatile in the meantime amidst continued uncertainty. Good news for Aussie travellers to old Blighty, but not so great for the Pound.
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Middle East tensions rise and so does the USD.... For now.
Just when we thought things couldn’t get much more confusing in the US, tensions have flared up once again in the Middle East, putting the market on high alert, but failing to affect the performance of the USD negatively. With the US/China trade war and now increased geopolitical tension between the US and Iran in the spotlight, the thing that seems to be slightly lifting AUD performance is that the Federal Reserve is starting to sound a bit more dovish (more on that below) when it comes to interest rates.
In important US economic data, it will be the results of the Federal Reserve’s policy meeting early Thursday morning Australian time that will dictate AUD/USD performance in the short-term. Traders are looking for the US central bank to make its wait and see monetary policy a bit clearer by hinting when the next rate cut could be due.
US sharemarkets have risen over the past fortnight on the back of a belief that the Fed will cut America's rates as early as July, with up to two more cuts following being expected by analysts. Rates are not expected to move this month, but a deterioration in the international environment and unstable economic results are expected to force the Fed’s hand sooner rather than later.
Economic jargon translator for those at home:
Dovish vs Hawkish
These are terms that refer to the general sentiment of a country’s central or reserve bank when talking about monetary policy.
A hawkish outlook occurs when they want to prevent excessive inflation, usually by increasing interest rates. In the absence of other major economic issues, rising interest rates generally put upward pressure on the value of that country’s currency, as investors can now get a higher return.
Taking a dovish stance happens when the economy is not growing, and the government is seeking to negate deflation. Central banks with a dovish outlook tend to decrease interest rates, which would put downward pressure on the value of the currency. Keep in mind that this value is still relative to other countries, so a dovish stance is not always bad news for the value of the currency. Just like when interest rates were lowered by the RBA this month, the AUD wasn’t negatively affected.
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