Aussie dollar's fortunes take a turn for the better

The A$ was among the best performing G10 currencies this week. My colleague David discusses how the Aussie was buoyed by the market’s dovish interpretation of the Federal Reserve as well as a strong rally in iron ore prices. Next week’s Australian calendar is very crowded with the release of the Banking Royal Commission report Monday then plenty of RBA communication and Australian data.

The key global event this week was the Federal Reserve’s first meeting of the year, which also included a press conference from Chair Powell. Rates were kept on hold as unanimously expected, but the Fed surprised with a dovish pivot.

Now, the Fed’s view on the US economy hasn’t actually changed much, discussing labour market strength and economic activity that has been rising at a solid rate.

But there were two vital changes. Firstly, the FOMC dropped their long-held view that “some further gradual increases” in the funds rate were likely and rather now will be patient as they determine future changes. 

Secondly, the Fed released a separate statement on its balance sheet management. At the December meeting, Powell said the plan was to “have the balance sheet run off on automatic pilot.” Now it is “is prepared to adjust any of the details” depending on economic and financial developments. The withdrawal of central bank liquidity has been suggested as a contributor to recent heightened volatility, so changes to the balance sheet run off are important. 

Both of these were taken as clear signs by the market that the US tightening cycle is now over. In recent months markets have swung from pricing substantial further rate hikes into 2020 to roughly flat in 2019 and toying with lower rates in 2020. This dovishness underpinned a solid rally in equity markets to end the week, while the US dollar and bond yields shifted lower. 

Domestically, the week started with some poor news with a shocking collapse in the NAB business survey.  Business conditions collapsed, with the largest monthly fall since the GFC, while confidence was steady at +3, although still a below average reading. 

The year has started with a fresh bout of negativity towards the Australian economy, and this data saw the market entertain further chance of RBA cuts. 

However, the AUD then regained some strength with the release of the Q4 CPI data. While the headline measure came in a tad above expectations, the core measures still show inflation well contained.  This print should provide some comfort to the RBA ahead of next week’s flurry of commentary, which was furthered by a media interview with RBA Board member Harper repeating the expectation that the next move in rates will be up

Iron ore has also rallied, up a stunning 12% over the past week, largely in response to the Brazil dam disaster which will constrict global supply. Whether this holds up is doubtful, but also added to the positive backdrop for the AUD. 

Lastly, there were signs of positive in US-China trade with President Trump tweeting that talks were going well. 

All up then, that is a conducive backdrop for the AUD which has been the strongest G10 currency this week, and is approaching 8 week highs.  Next week’s Australian calendar is very crowded with the release of the Royal commission Monday then plenty of RBA headlines - Board meeting Tue, Lowe speech Wed, SoMP Friday so there will be plenty of opportunities for volatility. However if the USD remains on the back foot and commodities supportive, the Aussie should find further support.