It’s been another rough week for the AUD against the big currencies, copping the largest losses against the USD as the Federal Reserve went with a .25 basis point cut instead of .50 but dropping against all the other major G10 currencies too.
The AUD did get some good news earlier in the week with some slightly snazzier than expected (but still soft) inflation data giving the Aussie a welcome helping hand in a tough week. There was a 0.6% rise in inflation in June, taking the annual consumer price index (CPI) to 1.6%. The RBA ideally want the CPI between 2 and 3% which is going to take a lot more spending people!
Higher inflation data can’t save AUD from consecutive losses
The Aussie dollar has struggled to catch a break this week, losing ground on all the major currencies and facing the prospect of more RBA interest rate cuts along with continued US/China trade drama and a softening Chinese economy. The one bright spot during the week, if you could stretch it that far, was the slightly above expectation inflation data for the June quarter.
The Consumer Price Index (CPI), measures the percentage change in the price goods and services consumed by households. In Australia, the CPI is calculated by the Australian Bureau of Statistics (ABS) and published once a quarter. The RBA watch this data carefully to see how much Aussies are spending and in what areas of the economy are performing positively. It forms part of their interest rate policy decisions each month.
For those interested in which items rose in cost and which fell in the CPI data - clothing & footwear came in on the high side of expectations, suggesting some impact from the recent AUD depreciation (High AUD = good for importers, low AUD = not as good) that will also be pleasing to the RBA. The cost of your weekend road-trip went up too, with a 10% jump in the price of petrol responsible for half of the lift June inflation! So maybe put Byron on the backburner and say g’day to Bali! Don’t forget to grab your IDR.
A move downward in interest rates by the RBA next week now looks at slightly longer odds with the slightly improved inflation results. With the RBNZ tipped to drop their official cash rate at their next meeting, the AUD might gain a bit of ground back on the NZD.
Against the major currencies though, the good news on the horizon looks slim and we could be in for some more losses, and definitely continued instability in foreign exchange markets.
UK Government doubles no-deal Brexit fund, Bank of England warns of recession
It looks like the UK are really stashing the cash for a rainy no-deal Brexit day possibility on October 31st; doubling the emergency fund for things like extra border security, easing traffic congestion in border towns and tackling queues created by delays at the borders. That takes the total fund up to £4.2bn!
This comes after Bojo’s fresh chief secretary to the Treasury, Rishi Sunak, said Britain would "hopefully" leave the EU by 31st October. The European Union has told Britain’s new Europe adviser the Brexit “withdrawal agreement is not up for re-opening.”Halloween could really be coming to the UK this year.
The Bank of England has made an ominous warning that the UK faces the prospect of a "one in three chance" of a recession even if there is a smooth exit from the EU. The Bank said the possibility of a weakened future trading relationship with the EU will slow the economy down over the coming years even if there is an orderly Brexit.
The Pound responded by falling to a new two and a half year low against the USD. The AUD dropped marginally against the GBP though, with markets still unsure about the RBA’s next move.
USD stronger as Federal Reserve hint rate cut could be one and done
As expected by the market, the Fed cut the cash interest rate by 25bps at its July meeting. The key message though was from Chairman Powell in the press conference when he stated this was “mid-cycle adjustment” and “not the beginning of a long series of rate cuts”. This caused The USD Bulls to come out hard, with the Greenback rising against most major currencies and chalking up a week straight of gains against the AUD.
The labor market in the US is still regarded as strong and economic activity has been rising at a moderate rate along with growth in household spending. The key trigger point moving forward turns back to US/China trade and global trading conditions, both of which have the ability to cause a rise or drop in the USD depending on the tone of Donald Trump’s tweets.
Speaking of Donald’s tweets, just as things were looking a little rosier on the trade front, the President went and tweeted that the US would begin “putting a small additional Tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China into our Country.” For a trade dependant currency like the AUD, it’s 2 steps forward and 1 step back when that’s the message that’s being delivered to the markets.
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