Sean Callow

The US dollar is lower against most G10 currencies this week, with the British pound’s 2% rally particularly notable. The pound jumped as the UK parliament voted in favour of an amendment that rejects a ‘no-deal’ Brexit under any circumstances. 

This does not actually guarantee such an outcome, and Prime Minister May will present her Brexit plan once again to parliament next week, but markets are considerably more optimistic that Britain will avoid a so-called hard Brexit

This optimism supported the euro as well, and supported global risk appetite, with equities rallying. This provided a positive global backdrop for the Aussie dollar but it only avoided the 70 cent level by a whisker and did not find inspiration in local data. 

The NAB business survey reported weaker conditions and confidence in February, with both indexes now below long-term averages. Housing finance approvals fell again in January, taking the annual decline in the value of home loans to 21%. 

Australian consumer sentiment also weakened, the Westpac-Melbourne Institute survey for March sliding 4.8%, including an 8% collapse in confidence for those who were surveyed after the release of the soft Q4 GDP data. Markets are priced for 1 1/2 RBA rate cuts by year-end, though we do note increased talk of looser fiscal policy in the April 2nd federal budget, just weeks ahead of the election. Helping the budget bottom line is the persistence of iron ore prices around $20/tonne above budget assumptions.

After these soft data releases, Aussie dollar traders will be nervous ahead of Australia’s February jobs data on Thursday. After a strong run of job creation, Westpac looks for a 5,000 fall in employment, well below consensus for a 15,000 rise. We also expect the unemployment rate to tick up to 5.1%. This outcome would be an obvious setback for the Australian dollar.

However, the Aussie might find some relief against the US dollar, just hours before the employment report, when the US Federal Reserve meeting concludes. A steady hand on the benchmark funds rate is assured at 2 ¼ to 2 ½ percent and the FOMC statement should highlight the strength of the US labour market. 

But the US dollar could take a hit on the FOMC’s quarterly Summary of Economic Projections, especially on the “dots” of the likely path of the funds rate. These will fall – the only question is how far. At this point, markets price a modest 25% chance of the Fed cutting rates by year-end.

If the dots are lowered substantially, Fed rate cut talk will increase, hurting the US dollar. This may be the only way the Aussie dollar avoids a break of 70 cents near term. We’ll talk to you next week. 


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