New highs for A$ as China gobbles up iron ore
At last Friday’s parliamentary appearance, RBA Governor Lowe said that the activity restrictions imposed in Victoria in response to the resurgence of Covid-19 cases would reduce Australia’s GDP by at least two percentage points which will quote “broadly offset the recovery that's been taking place in most other parts of the country.” As such, the RBA is braced for Australia’s economy not to grow until Q4.
Westpac expects a wide divergence in the economic performance of Australia’s states. Overall, national GDP is likely to be about flat in Q3, then grow 2.8% in Q4. But obviously these forecasts, along with the RBA’s and everyone else’s, are heavily dependent on control of the virus.
On this front, the past week has at least provided some cause for wary optimism in Victoria. The new case count over the past 4 days has been below 250 per day. This is still far too high for comfort but it is less than half the early August peak.
Australia’s two largest states by population, New South Wales and Victoria, have the weakest economic growth pulse. However, NSW is also reporting better coronavirus numbers, with the past week producing just 35 cases out of 109,000 tests, down from 76 cases the previous week.
Still, as last week’s consumer sentiment survey showed, confidence outside Victoria remains fragile, acting as a brake on Australia’s recovery.
This leaves the Reserve Bank needing to brace itself for the downside economic scenarios it presented last week. But short term, fresh monetary policy action appears to be unlikely, reinforcing the Aussie dollar’s yield support.
So while the Aussie has suffered at times this week from global risk aversion, this follows 19 month highs against the US dollar, just under 73 cents. The Aussie has also performed strongly against the New Zealand dollar, reaching 2 year highs above NZ$1.10.
It is surely no coincidence that the RBNZ continues to talk up the prospect of adopting a negative cash rate next year and is open about its preference for a weaker currency.
Meanwhile the Australian dollar continues to find support from commodity prices. China’s ongoing recovery underpins demand for industrial commodities, with copper reaching a 2 year high this week and spot iron ore surging to $128/tonne, up more than 50% since April.
Of course not all commodities are so buoyant but overall, Australia’s commodity export basket is holding up well, so we should expect trade surpluses to continue.
In the week ahead, we will see Australian Q2 construction and business investment, which are inputs to the GDP report, which will of course be our worst on record, as it has been all around the world. The report is due on September 2nd.
The global focus however will be on the Federal Reserve. The Kansas City Fed’s annual economic symposium usually sees central bankers gathering in scenic Jackson Hole, Wyoming. This year it will be held online. Chair Powell will deliver the keynote address which should provide clear guidance on what to expect at the September FOMC meeting.Given that markets were very volatile this week in response to the July FOMC meeting minutes, Powell’s speech could have a large impact.
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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.