Macro

Considering the past week has included global markets being shaken by a collapse in a key US manufacturing survey to a 10 year low, the S&P 500 kicking off Q4 by sliding to 5 week lows and of course the RBA rate cut, the Australian dollar remaining above 67 cents is a resilient performance.


To be sure, the Aussie did briefly print a fresh low since March 2009 against the US dollar, around 0.6670. And while the trade-weighted Australian dollar is slightly above early August lows, the RBA should be content that its decision on Tuesday to cut the cash rate to 0.75% and reiterate that it is prepared to ease monetary policy further if needed will ensure the Aussie doesn’t see any of the quote “unhelpful” appreciation Governor Lowe warned about last week.

The RBA Board statement and subsequent speech by Governor Lowe should keep markets leaning firmly towards further easing. But whether the Aussie suffers any renewed pressure on this front near term is debatable. Pricing for a 5 November rate cut to 0.50% is an awkward 50% and may well remain finely balanced at least until we have some clarity on US-China trade talks, which are expected to take place on Thursday and Friday in Washington, DC.

Westpac’s base case remains for no further change in the cash rate until February 2020, though there is some risk of a December move.

The Aussie dollar normally weakens when global equities are turbulent but it is almost flat over the week, in the mid-67 cent area. It appears the Aussie has been resilient against the US dollar in large part due to the fall in US yield support. Closely watched surveys of US manufacturing and services were sharply weaker in September. Market pricing for the Fed to cut rates again on October 30th has jumped from 45% to 85% over the week.

Of course this could change after the US employment report later today, but the Fed will remain concerned about the global economy. This week’s European data was also poor, including a 6 year low on the Eurozone September purchasing managers survey.

Short term, the Australian dollar has limited inspiration from China, with mainland markets closed for the annual National Day holidays until Tuesday. These holidays limit price guidance on iron ore but this week we saw that Australia’s trade surplus remained historically very large in August, at $5.9 billion, even as iron ore prices tumbled on trade war concerns.

Sluggish iron ore shipment volumes from Brazil add to the sense that Australia’s resources export earnings might hold up for a while yet, supporting the currency.

Along with the US-China trade talks, in the week ahead Australian markets will focus on updates on September business confidence from NAB and October consumer sentiment from Westpac. These reports seem likely to leave markets uncertain about when the RBA will cut rates again. 



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