Macro

The strength of the US dollar remains a sore point for President Trump. This week he reported its value as the highest in US history. We hear many claims of superlatives from the White House, but in this case, it is not far off the mark.

The surge in the US dollar against a weighted basket of its trading partner currencies since mid-2014 has been substantial and the Federal Reserve’s daily index this week rose marginally above the 2002 highs. It is a very different story after adjusting for relative inflation rates, a long way short of the “super-dollar” of the mid-1980s.

Still, we agree with Trump’s basic point that the US dollar is very strong, though we note that such strength is simply explained by the US economy’s outperformance of most of its major trading partners over the past 5 years, resulting in demand for US assets and higher interest rates.

Monetary policy is of course the even hotter topic for Trump ahead of the Kansas City Fed’s annual symposium at Jackson Hole, Wyoming. The dollar and US yields bounced a little this week on the minutes of the FOMC’s end-July meeting, which reported that “most” members viewed the 25 basis point rate cut as a “recalibration”, a “mid-cycle adjustment.”

Of course a key reason for that rate cut was the US-China trade war and the very next day Trump announced 10% tariffs on around $300bn of Chinese imports, sparking a slide in global equities and more aggressive pricing for Fed easing.

So a lot is at stake as Fed chair Powell takes the podium at Jackson Hole. Increased concern over the global economy would be consistent with Westpac’s call for a total of 75 basis point cut in the funds rate by year-end.

The Australian dollar has spent another week hovering around the 67 to 68 US cent area. The Aussie seems to have quite a few factors in its favour. RBA minutes this week left the door open to lower rates “if the accumulation of additional evidence” supported further easing. This apparent lack of urgency makes a 3 September rate cut even less likely, with market pricing down to just 10% and a move by October (which remains Westpac’s base case) down to a 60% chance.

Along with a cautious RBA near term, the Aussie might also find support as resource company dividend season looms in September. Australian shareholders are set to enjoy unusually large payments. Given that mining companies operate globally in US dollars, this should mean temporary demand for the Australian dollar.

But the news on the commodity side is cooling, with iron ore prices falling to US$85 per tonne this week, reaching 5 month lows. Commodity prices will be closely watched in the week ahead as we draw closer to 1 September when the US is due to impose tariffs on an unknown portion of the $300bn in Chinese imports.

Fed chair Powell’s speech should set the path for AUD/USD early in the week. Beyond that, the domestic data calendar ends its quiet period on Wednesday, with the Q2 construction work survey, followed by capital expenditure data on Thursday. 



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