The Aussie dollar looks to end the week right around where it started against the major currencies as a lack of major catalysts has left the market in limbo for the last few days. The AUD showed some signs of positivity against the USD as the Federal Reserve look more and more likely to cut interest rates this month but was held back by poor consumer and business confidence data released this week.
The major driver of AUD performance over the next couple of days will likely be Chinese trade data due to be released today. If the US/China trade war has negatively impacted China’s ability to trade and grow economically, the AUD is closely linked enough to the Chinese economy to feel some downward pressure. On the flipside, if US data released next week comes out lower than expected and the Federal Reserve moves to drop rates, it could be the USD under pressure.
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The release of consumer and business confidence data this week has given a pretty clear insight into how the Australian economy is viewed post RBA rate cuts moving forward and it’s not exactly pretty. The Westpac–MI consumer sentiment survey showed a 4.1% drop in confidence in the economy in July and even starker was a 12.3% drop in the outlook for the economy for the next 12 months, representing 2 and 4 year lows respectively.
The NAB business survey for June also showed a drop in confidence of 5 points, erasing May’s gain of 7 points and showing that result may have been an aberration.
These results clearly show that consumer trust in the Australian economy is dropping despite interest rate cuts from the RBA, the government’s tax package, signs that the housing markets is stabilising and even some recent positive news on the US/China trade war front.
These domestic conditions and uncertainty in China has really kept a lid on the AUD recently, not allowing for any positive wriggle room despite a Federal Reserve more willing to drop interest rates and a Brexit that just won’t go away.
It looks like the market views the Federal Reserve as the most important factor for the AUD at the moment and a rate cut of .25 or .50 basis points at the July 31st meeting could see a slight boost for the Aussie. Although the Australian dollar itself is highly tethered to China’s fortunes and a further drop in their trade output could spell bad news for the AUD in the short term.
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Brexit remains the key issue in the UK at the moment but it’s had to remain in the back seat for another week with the leadership battle for the Conservative Party staying front and centre. Bloomberg has released a survey of UK conservative party members showing that 72% back Boris Johnson to be the next leader of the party and PM.
Both Johnson and his adversary, Jeremy Hunt have said a no-deal Brexit would not be shied away from, despite almost total consensus that it would be a calamity for the UK’s economy. Staunch opponent of a no-deal solution and Pensions Secretary hopeful, Amber Rudd said today that “both candidates have said that no deal is part of the armoury going forward, and I have accepted that”.
There is also some critical economic data due to be released in the UK shortly. The combination of employment, inflation and retail sales data over the next week will be critical for shaping consumer and market confidence in the short term.
Economists are expecting employment to remain steady, but are less hopeful on retail figures, lamenting that further drops in sales will negatively affect the GBP leading up to the election of the next PM on either the 22nd or 23rd of July.
This is likely to keep the AUD and NZD performing at least neutrally despite domestic pressures and any move from the Bank of England to lower rates or move to a more pessimistic policy stance could see both currencies make some modest gains.
The Trade War with China is still simmering front and centre, but could the US be willing to embark on a new trade war with its oldest ally, France? President Trump has lashed out recently at new French laws designed to increase taxes on primarily digital companies who look to reduce their overall profit by using low tax havens. The increased levy would hit about 30 companies, including Google, Apple, Facebook and Amazon. Finance Minister Bruno Le Maire defended the move saying, “we are merely re-establishing fiscal justice. We want to create taxation for the 21st century that is fair and efficient”
The Irish Finance Minister, Paschal Donohoe also weighed in on the matter, arguing the taxes were "highly likely to exacerbate global trade tensions and damage cross-border trade and investment". France and the USA have history in the trade tension department with Trump already imposing new tariffs on imports of EU steel and aluminium and threatening tariffs on cars and auto parts in their trans-Atlantic trade negotiations.
All this uncertainty is keeping pressure on the USD and helping the AUD and NZD hold onto some ground in the face of mixed data domestically. For the short-term, USD performance hangs on the Federal Reserve and their rates decision, trade negotiations with China, domestic employment data and any new trade wars that might break out. Stay tuned to find out where the next one could be!
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