RBA stands idle, trade war weighs
As widely expected, the Reserve bank of Australia left its official cash rate target unchanged at 1.50%. The overall tone of the statement remains positive with Governor Lowe staying positive on both Australian and global economic developments. However, he expressed reserves about the outlook for household consumption as “Household income has been growing slowly and debt levels are high”. The central bank remained cautious about the inflation outlook against the backdrop of “low growth in labour costs and strong competition in retailing”, but expects a gradual pick-up in the course of the year.
Nevertheless, the trade war initiated by the United States could dampen significantly Australia’s economic outlook. Indeed, as an open economy that relies heavily on exports, a global trade war could have dramatic consequences; especially should the US impose trade tariffs on Chinese products, Australia’s biggest trade partner.
After rising more than 1% on Monday, AUD/USD edged lower on Tuesday as investors take a step back to assess how much juice is left in the Aussie. Yesterday, the currency pair tumbled on the 0.7660 resistance level (Fibonacci 61.8% on April-May debasement). A break of this resistance would open the door towards the following one that stands at 0.7813 (high from April 19th).
Crude currencies
After a brief rally supported by speculation of tight supplies, crude oil crashed. WTI experienced its largest single-day fall since 2017, as supply increases hit the wires. Negotiations between OPEC and non-OPEC producers have moved faster than expected, but the biggest surprise was Saudi Arabia’s commitment to “work with major producers and consumers within and outside OPEC to mitigate the effects of any supply shortages.” We suspect producers will marginally increase output limits. Meanwhile, US inventories increased for their 14th week. In summary: higher oil prices cannot be relied on to support growth and therefore commodity currency valuations.
USD/CAD lower
Canada’s trade balance is at record negative levels: additional oil revenues will not bridge the gap. Fear of a full-tilt trade war in steel and aluminium tariffs is weighing on growth. Manufacturing is close to overheating, yet households could tighten spending as housing markets weaken and credit tightens. Last week’s Bank of Canada meeting triggered a CAD rally as the central bank removed “cautious” from its monetary policy statements. This raises the likelihood of a July rate hike: higher interest rates could be the catalyst for a stronger CAD.
