Author: Stuart Talman
The Australian dollar fell to 3 year lows vs the US dollar last week - the sharp deterioration in US x China trade relations and an impending RBA rate cut the main drivers.
Firstly, on the local front – in the RBA’s 07 MAY statement, the central bank commented that it would be “paying close attention to developments in the labour market at its upcoming meetings” – signalling to the market that the one missing piece for the RBA to shift into easing mode was a deterioration in the unemployment rate.
In what was a mixed April labour force report, released last Thursday – the key focus was the unemployment rate climbing to 5.2%, with little consideration given to the stronger than expected jobs growth, at 28k.
So with wages growth still stalling, the unemployment rate ticking up and the RBA recently cutting its growth and inflation forecasts, the probability of a June rate cut now sits at 80% with the market expecting that by July, it is a foregone conclusion that the official cash rate will be lowered to 1.25%.
Tuesday will see the release of the RBA minutes from the May policy meeting with Governor Lowe speaking 45 mins later on the Economic Outlook and Monetary Policy. Market participants will be listening intently to the speech – seeking confirmation that the RBA will be acting sooner rather than later as rates are again re-set at historical lows.
With the Aussie dollar falling close to 2.50% vs the US dollar during May, the question on many a trader’s lips – how much farther can the AUDUSD fall?
The deteriorating growth outlook is a key weight on the Aussie dollar and with the US and China now facing each other head on, the growth outlook has worsened. This past week China has questioned the US’s intentions and willingness to compromise and progress trade talks, suggesting that it would be meaningless for Mnuchin to head to China for another round of talks.
"The US does not show any sincerity in continuing talks... Instead, it is extending its pressure tactics. The US on one hand says it engages in talks, but on the other hand keeps using petty tricks to destroy the atmosphere for talks."
And whilst there was a faint glimmer of hope with the Trump administration reportedly delaying a decision on auto tariffs for 6 months, this glimmer was extinguished following the news that the US had blacklisted Huawei – the China telco now required to seek US government approval should it wish to acquire technology from US corporations.
Add the US ratcheting up of tariffs on Chinese goods and the retaliation from China – this all puts a significant weight on the global growth outlook and sentiment with AUDUSD being adversely impacted.
Given the current negative mix of both local and offshore factors, the inclination is that the Aussie dollar will test the 2019 (early JAN.) flash crash low near 0.6750.
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