As discuss in last week’s trade week ahead the AUD currently has several global levers pulling it in several directions.
These global levers have, in the main, pulled the AUD higher
Iron ore – the higher than expected average price per tonne coupled are having positive impacts on Australia’s terms of trade. It also ripped higher on the tragic news out of Brazil.
US-China trade war concerns are easing, the fact the world’s two largest economies are moving into a more constructive phase of the trade dispute. It has allowed emerging markets to rally and EM currencies or quasi-EM currencies such as the AUD to appreciate with the positive news.
The Federal Reverse easing its stance on its rate hike cycle removing the risk global financial conditions could get even tighter to a point of restrictive.
These levers had pushed the AUD through 3 cents since the early January low to a range of 72.50-72.80. Impressive considering domestic economics throughout January has been nothing short of poor. December retail sales this week underlying the issues facing the domestic economy as spending collapse in a month traditionally seen as a strong one due to Christmas sales.
The only domestic leaver that is having an effect on the AUD is Australia’s monetary policy ‘direction’, evident by this week’s trade.
Domestic data may not weight on the AUD directly as one would expect, but the data has forced the RBA’s hand which in turn has driven the AUD lower.
It’s the following comments from Governor Lowe’s National Press Club address that has changed the game:
“Looking forward, there are scenarios where the next move in the cash rate is up and other scenarios where it is down. Over the past year, the next-move-is-up scenarios were more likely than the next-move-is-down scenarios. Today, the probabilities appear to be more evenly balanced.”
“On the other hand, given the uncertainties, it is possible that the economy is softer than we expect, and that income and consumption growth disappoint. In the event of a sustained increased in the unemployment rate and a lack of further progress towards the inflation objective, lower interest rates might be appropriate at some point. We have the flexibility to do this if needed.”
The AUD fell like a stone on this news to 71.69 from 72.40 and has eased to 71.00.
Clear dovish shift. The RBA is now completely neutral having dropped its hike bias however by no mean is this an outright easing bias either there are still plenty of positive undertones.
Second point; the RBA still uses its ‘pushing on a string’ analogy around cutting rates at this level. i.e. that if you push on one end of a string does it move the other end?
In my view the RBA is now a Dove-Hawk Gryphon it wants to have a hiking bias, but the data isn’t allowing it. However, won’t cut rates anytime soon as things are still ‘stable’ in its eyes. According to the Statement of Monetary Policy Australia is still forecasted to grow at 3% in 2019 and inflation is to hit 2%. Not the kind of conditions one would expect in a cut in. Thus, its being two birds at once. Over the coming weeks as Asian markets return from Chinese lunar New Year and EM markets reopen its likely that the AUD may in fact return to pre-Lowe’s speech of 72.4 as the market comes to terms that the RBA is not going to do anything.