Aussie dollar sinks to a 2 month low
Earlier this month the Aussie dollar was rebuffed as it tested 74 cents, a 2 year high. But the past week has produced a genuine correction, with the Aussie falling for 5 days in a row to just above 70 cents, its lowest levels since late July.
Admittedly a good part of this fall is due to a stronger US dollar. The greenback’s value against a basket of major currencies reached 2 month highs this week, including gains against even safe haven currencies the Japanese yen and Swiss franc.
The US dollar has been finding support from European Central Bank officials expressing concern over a strong euro, an expanding second wave of virus cases in Europe and confusing commentary from Federal Reserve officials which indicated somewhat less generous monetary policy settings in future.
The Aussie is down about 3% against the US dollar over the week and it has also fallen against the likes of the euro and the British pound. Such price action is not unusual when equity markets are under pressure, given the Australian economy’s sensitivity to global growth.
Still, there are local sources of pressure on the Aussie as well. On Tuesday, RBA Deputy Governor Debelle was quite cautious about the outlook for the Australian economy, warning that despite the stronger than expected August labour force survey, unemployment was likely to rise.
Debelle also spoke about the RBA’s options for further monetary easing. Following the speech, Westpac changed its view on the outlook for RBA policy. We now expect that at its 6 October meeting, the RBA will cut both its overnight cash rate and its target rate for the 3 year government bond from 0.25% to just 0.1%.
The Aussie dollar and market interest rates both fell in response to Westpac’s new view, though the RBA is still not attracted to the idea of negative interest rates, which limited the damage to the currency.
This week has also seen a pullback in commodity prices. Benchmark iron ore has dropped $15 over the past 10 days to $114 per tonne. The gold price has also tumbled though coking coal and copper are holding up.
Australia should continue to record trade surpluses for some time, with resources exports strong and demand for imports such as motor vehicles weak. Of course international tourism remains shut down and revenue from international students in Australia has fallen by 50% this year.
Australia’s calendar in the week ahead is unlikely to have much market impact, including August building approvals and private credit, then the final reading on August retail sales, after the preliminary survey this week showed a sharper than expected decline, following a strong reading in July.
As a result, the Aussie dollar will look to offshore markets for inspiration. Daily coronavirus cases will be watched in hot spots such as the UK which tightened social restrictions this week. And in the US, while the data calendar is fairly low key, politics will generate daily headlines, especially around the first presidential debate.
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Sean Callow is Westpac Bank's Senior Currency Strategist, based in Sydney. Sean focuses on the Australian dollar and other G10 and Asian currencies. He has worked in strategy and economics roles in New York, London, Singapore and Melbourne.