Aussie better bid as RBA stands idle
The Australian dollar stood amongst the best performers on Tuesday morning after investors have been wrong-footed by the Reserve Bank of Australia’s (RBA) monetary policy decision. Indeed, Governor Lowe acted contrary to the expectations by maintaining the Official Cash Rate at record low 1.5%, while market participants expected a 25bps cut. The Australian dollar rallied more than 0.70% to $0.7048 following the RBA decision.
The statement reiterated the view that the outlook for the global economy is “tilted to the downside”, while the outlook for household consumption remains the main domestic uncertainty. Surprinsingly, the RBA remains quite confident regarding the growth outlook as it only trimmed its forecast by 0.25% to 2.75%. Philip Lowe also noticed “there has been little progress in reducing unemployment over the past six months.” He concluded by saying that there was “still spare capacity in the economy” and that further improvement in the job market was necessary for inflation too go near the target range.
Despite this relatively upbeat statement, we believe that the central bank has definitely not closed the door to another rate cut. Australia’s dependency on Chinese imports has continued to increase over the last few year. Indeed, more than 38% of Australia’s exports go to China. The slowdown of the world’s second largest economy will inevitably affects negatively the Aussie economy. It may take time to materialize but it will. Luckily, the RBA is one of the few central banks that has room to manoeuvre as interest rates are largely – compare to most central banks – above zero. Against such a backdrop, we maintain our bearish view on the Aussie: However, we do not expect a sharp debasement but rather a continuous depreciation as China’s economy slowdowns and the interest rate differential makes the Aussie less attractive to investors.
German economy faces toughest consequences of trade war
German manufacturing sector remains in recession territory since January 2019. The release of April manufacturing PMI of 44.4 is part of a downward trend that began last July and which is expected to last, as German factory orders signal a drop in industrial production for the coming quarter. Although the month-to-month metric in factory orders is pointing to a rebound of 0.60% (prior: -4%), the price-adjusted metric that removes major orders fell at -1.90%. The expansive monetary policy from the ECB is of good help for both the construction and service sectors by supporting domestic demand, albeit Germany’s heavy dependence of external trade means that further escalation in current Sino-American trade conflict would put the economy in a recession across all sectors. Trade duties of 25% on USD 200 billion Chinese products are expected to be imposed on Friday while a Chinese delegation accompanied by Chinese Vice Premier Liu He arriving in Washington on Thursday could reverse the situation. At current, we see little upside for the single currency. The dependence over Asian demand makes the euro even more sensitive to potential US – China discord intensification. Today’s EU Commission economic forecast could become less relevant if the situation on Friday worsens.
Currently trading at 1.1200, EUR/USD is heading along 1.1170 short-term.
