USD maintains positive momentum despite lack of clear progress on US-China trade talks
On Wednesday morning, the US dollar was better bid against most of its peers despite the Fed dovish U-turn. The greenback rose the most against the Australian dollar, with AUD/USD down 0.72% to $0.7030, amid disappointing growth figures for the fourth quarter (2.3%y/y versus 2.6% exp. and 2.7% in 3Q). Only the Japanese yen was able to hold its head above water – thanks to its safe-haven status – with USD/JPY consolidating around 111.80. Indeed, despite positive headlines regarding trade talks between China and the US, market participants were not entirely reassured. However, it seems that investors have become increasingly less inclined to load on risk following such positive headlines; after all, the Trump administration has been using that trick repeatedly for months. Therefore, it is normal it doesn’t work that well anymore.
We believe that USD bears will continue to struggle, thanks to higher interest rate in the US and a persistent risk aversion. Indeed, rates in the US are more attractive compared to other countries in Europe and Asia, which gives the dollar a clear advantage. Moreover, the elevated risk aversion is benefiting safe-haven assets, such as the yen and the buck. On a side note, it is interesting to notice that the Swiss franc seems to have lose its safe-haven status, which suggests that the strategy implemented by SNB (i.e. negative interest rate coupled with FX interventions) starts to bear fruit finally.
Investors have remained relatively insensitive to the publication of soft and hard data. The positive surprise in ISM non-manufacturing (59.7 versus 57.4 expected) yesterday has had little effect on the USD. Today, traders will be watching MBA mortgage rate application, February ADP employment change (exp. 190k, prev. 213k), December trade balance (exp. -$57.9bn, prev. -$49.3bn) and the Fed Beige book.
Aussie falls on bearish outlook
The AUD/USD pair hit a two-month low as the Australian economy grew by 2.30% in December 2018, its weakest pace since June 2017. Expectations of 2.80% were greatly missed, suggesting the Reserve Bank of Australia’s growth outlook of 3% in 2019 should be downgraded soon. It’s likely the RBA will cut interest rates this year. Wage growth remains far from ranges of 6 years ago (2.30% in Q4 2018) while the sharp drop in investment and construction activity due to declining house prices should prompt a reaction. January capacity utilization of 81.40% is its lowest since April 2017.
Yet fiscal stimulus by the Australian government and rising commodity prices allow the RBA a wait-and-see approach. Lower growth should lead to monetary easing sometime in the first half of 2019. AUD/USD is expected to drop further short-term: currently at 0.7030, AUD/USD is expected to head along 0.7020 short-term.
