Is politics keeping a lid on the Aussie dollar?
The Australian dollar has emerged a little stronger after a very busy week. Most of the headlines were positive, with the one real negative coming from the RBA.
While there was no surprise in the steady hand on the cash rate at 1.5% or in much of the language of the statement, the RBA did not repeat March’s 3% growth forecast for the Australian economy this year.
Furthermore, the RBA’s summary paragraph included a new reference to monitoring developments, which hinted that it was focusing more closely on near term data. We are comfortable with our call for steady rates at the next 3 meetings, before an August rate cut. But the statement knocked about half a cent from the Aussie dollar.
Australia’s federal budget was released just 5 hours later, to little FX or rates market response. The Coalition government is proposing stimulus that would have only a modest impact on the economy over the next year or two. In contrast to some other countries – most obviously America - fiscal prudence is seen as a vote-winner by both the Coalition and Labor, with the government touting a projected surplus in 2019/20. The US budget deficit in contrast is estimated to be around -$900 billion this year, or -4.2% of GDP.
Political pundits expect an Australian election to be called as soon as this weekend, to take place in mid-May. An unofficial election campaign has really been running since the removal of Prime Minister Turnbull in August 2018, with some evidence that this has hurt the Australian dollar against for example the kiwi.
The political uncertainty and ongoing debate over possible RBA rate cuts seem to be keeping a lid on the Aussie, given strong data this week. February updates on building approvals, retail sales and the international trade balance all surprised on the strong side.
The 0.8% rise in retail sales was the largest since November 2017, though it does follow a period of weakness so it is too early to upgrade the view of a cautious consumer. So too the 19% surge in building approvals in February was exaggerated by high rise apartment approvals, which could reverse in March.
The trade data however was spectacular – a record high surplus of $4.8 billion, which extends the sharp improvement in Australia’s trade position over 2018. Iron ore exports were notably strong. Recent weakness in exports of coal used for electricity generation suggest some softening in the trade surplus in coming months, but overall it is worth remembering that Australia’s trade position has improved sharply over the past year, despite the US-China trade battle.
Indeed the trade position has improved so much that Australia’s current account deficit, which includes interest payments on foreign debt, is on track to narrow to less 1% of GDP this year, the smallest deficit since 1975. This is a clear positive for the Australian dollar.
Internationally, we saw a rebound in China business sentiment in March, plus gains in global equity markets. In the week ahead, we see Westpac’s Australia consumer sentiment survey for April and February home loan approvals.
Europe’s focus will be on the EU summit on Wednesday where they decide whether to allow the UK to remain in the EU for a while longer or force a hard Brexit. This is one of the topics we will discuss next week.
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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.