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AUD News: AUD holds firm despite growing global and domestic pressures

24th May 2019

Turning on the computer screen this morning to see global stocks in the red, commodities taking a hit, increasingly harsh rhetoric being traded between the US and China and Brexit continuing to drag on with no clear solution, it’s actually a bit surprising that the AUD has not fallen below the low of last Friday’s trade. While it’s good news for Aussie travellers, many economists are pondering just how long the AUD can hold firm in the face of global uncertainty and domestic economic factors. For the moment though, 1 Aussie dollar will buy you:

0.6746 US dollars
72.9493 Japanese yen
0.5963 euros
0.5271 Great British pound
0.8846 Canadian dollars
1.0279  New Zealand dollars
0.8973 Singapore dollars

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RBA Governor gives strongest hint yet at rate cut

Despite the lack of an imaginative title, all eyes were on Tuesday’s Economic Outlook and Monetary Policy speech delivered by RBA Governor, Dr Phil Lowe.  The RBA isn’t known for giving too much away, but this speech gave the strongest indication yet that an interest rate cut would follow the bank's June meeting, taking the cash rate down to a new record low of 1.25%.

Dr Lowe stated, rather bluntly for an RBA Governor, that “a lower cash rate would support employment growth and bring forward the time when inflation is consistent with the target. Given this assessment, at our meeting in two weeks’ time, we will consider the case for lower interest rates.” This path set by the RBA is a 180-degree turn from the end of 2018, when they assessed “that the probabilities of an interest rate increase and a decrease had become more evenly balanced than they were in 2018”. So, what exactly has changed sentiment since then?

In short, not much but enough to keep uncertainty high enough to protect against actively. In the last quarter of last year, the US Federal Reserve was still set on two or three rate increases for 2019; rises that will likely not eventuate. Domestically, economic growth in the second half of 2018 was below RBA expectations, and the first half of 2019 has continued in the same manner. The unemployment rate rose slightly to 5.2% in April with inflation remaining below target at 1.5%. F Quarter Construction Done data, a key metric that flows directly into GDP was released the day after the RBA’s speech showing a 1.9% drop in construction, likely to push the probability of a rate cut higher. In the short term, these developments are unlikely to hurt the AUD too much, with markets having priced in a rate cut already.

Time running out for UK PM Theresa May

As frustrated British citizens went to the polls to vote in elections for the European Parliament many of them don’t want anything to do with, Theresa May lost her 31st senior minister to resignation. Commons Leader, Andrea Leadsom quit cabinet saying she no longer believes the government's approach will be able to deliver Brexit effectively.

Already under increasing pressure to resign, Theresa May’s fourth iteration of the Brexit Bill, the legislation required to bring her agreement into UK law, was knocked back overwhelmingly by her own Conservative party. Speculation is now rife that May could announce her resignation as early as this weekend, setting the stage for a complex and unwanted sideshow to choose a new Prime Minister to take Brexit to its conclusion.

Due to the growing uncertainty around May’s position and the possibility firming once again of a no-deal Brexit, it was surprising to see the GBP remain relatively stable during trading yesterday. This suggests that global traders have already priced in the possibility of May’s resignation into the value of the pound. However, it remains to be seen what effect a protracted leadership battle or imminent possibility of a no-deal Brexit will have on the GBP moving forward.

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US/China Trade War drives market losses and lowers USD

Before the latest round of economic tariffs imposed by the US and China in tit-for-tat moves, US Government rhetoric and share markets had been rather bullish on putting the Trade War in the rearview mirror. However, since the imposition of trade tariffs and restrictions on Chinese technological companies, the Trade War has only intensified, with its effects felt even further. Despite President Trump announcing he would be meeting Chinese President Xi at the Osaka G10 summit next month with a reasonable possibility of a trade deal, the USD and US stock markets have not reacted with positivity. Overnight, the Dow Jones, Nasdaq and S&P all lost over 1% of their total value, with technology companies being hit the hardest once again. The technology sector is the darling of the U.S stock market, and commentary from the Chinese side claiming the U.S Administration is embarking on a “technology cold war” has put a dent in the market’s confidence.

In a further sign that the US doesn’t expect an end to the Trade War any time soon, President Trump today announced a $16 billion package to help farmers caught in the crossfire. In the US rates market, all Treasury yields between three and ten months finished lower in a sign that the Federal Reserve could be gearing up to cut interest rates this year. The good news for AUD/USD markets in the short term at least, is that this uncertainty is likely to place upwards pressure on the AUD, possibly protecting it from losses due to the broader uncertainty. This is supported by the fact that the AUD/USD lifted overnight despite the Trade War intensification and a large drop in crude oil prices which would typically strengthen the USD and lower the AUD/USD market.

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