Aussie finds some form after the FOMC cuts rates and RBA rate cut expectations ease. Next week is a busy one for Australia including the RBA Board meeting and a Statement of Monetary Policy.
Aussie finds some form
The Aussie is finally developing some real momentum. So far this week it’s been the best performing G10 currency, rallying about a cent against the US dollar to a high of 0.6930, its best levels since late July.
By week’s end the Aussie has settled back to around 69 cents. The path seems open to higher levels in the near term.
Reduced geopolitical risk – Brexit and US-China trade – and perhaps even more potently, the slashing in RBA rate cut expectations for the rest of this year have been the big drivers of AUD’s recent gains.
Locally, the Q3 CPI and comments from governor Lowe were the main points of interest.
The annual pace of headline inflation lifted to 1.7%yr, from 1.6%yr and while that’s a modest acceleration from 1.3%yr in the March quarter, it is still below the bottom of the RBA’s target band. Underlying measures were soft too. The key measure watched by the RBA – the trimmed mean – came in at 0.4% in the quarter, pushing the annual rate to 1.6%, still undershooting the bank’s preferred target of 2 to 3 %. That is the 15th consecutive quarter of below-target inflation for the RBA.
But the chances of a Melbourne Cup rate cut from the RBA are low. At the start of the week markets had been giving about a 20% probability of a Melbourne Cup RBA cut but that has eased to a negligible to 5% after Governor Lowe’s comments and the CPI data. Inflation is subdued but the RBA is more focussed on unemployment and getting that lower. Governor Lowe repeated earlier this week that while the Bank is prepared to adjust policy if needed, they are confident low rates are supporting a gentle turning point in the economy. That suggests the Bank is prepared to wait and see how the economy has reacted to the three cuts this year.
The Fed was also a big driver this week. They cut rates for the third time this year but indicated that they have finished cutting for now, dropping their pledge to act as appropriate – language that was code for further easing – and instead vowing to continue to monitor the economy.
While a Fed cut had been priced in markets still gyrated sharply. Usually when central bankers say they’ve finished cutting the currency in question gets a boost. The USD did briefly rally but it ended the day lower, along with interest rates.
It appears markets took note of Chair Powell’s press conference comments that the Fed is still prepared to cut if there is a reassessment of the outlook. But in the other direction, he said they’d need to see a really “significant and persistent” move up in inflation before they’d contemplate reversing insurance cuts.
The Fed’s openness to more cuts if needed and a strong signal that any hikes are a very, very long way off also helped fuel gains in Aussie. The Fed’s planned pause also takes some perceived pressure off the RBA to deliver yet more easing before year-end.
But the longer term picture hasn’t really changed much for the Aussie, with the RBA a long way from reaching either its inflation target and desired unemployment rate (around 4.5%).
We also expect any US-China trade agreement to underwhelm. Indeed by week’s end the AUD was easing back from three month highs on a Bloomberg report that cast doubt over the longevity of a US-China trade truce. Chinese officials are said to be unwilling to entertain the structural reforms the U.S. is seeking in pursuit of a ‘phase two’ accord without a major rolling back in tariffs.
Next week is a busy one for Australia including the RBA Board meeting and a Statement of Monetary Policy, as well as retail sales and trade balance figures for September.
Event risk
Australia Sep retail sales, ECB President Lagarde speaks (Mon), China Caixin services PMI, US Oct services ISM, RBA Board meets (Tue), Australia Sep trade balance, BoE meets, NY Fed President Williams speaks (Thu), RBA Statement of Monetary Policy, Australia Sep housing finance (Fri)
