US-China trade tensions remain in focus, adding weight to AUD/USD. But after soft data in recent days, whether the pair tests the 0.6800 area in the week ahead probably depends more on what Governor Lowe has to say on Tuesday.
Westpac has long forecast a drop in AUD/USD below 0.70. However, it’s only really been in the last week or so that momentum has started to build towards our 0.68 year-end target. The sharp deterioration in trade relations between the US and China in the second week of May that saw Trump raise tariffs on $200bn of imports from China from 10 to 25% and order his trade representative, Robert Lighthizer, to start work on raising tariffs on all remaining imports was one factor pushing the A$ below 0.70.
However, the other was RBA guidance on the Australian economy. A week ago, the RBA cuts its forecasts for growth and inflation to barely acceptable levels despite making the technical assumption of two rate cuts in its forecasts. In the RBA’s May 7 policy statement the Board noted it would be “paying close attention to developments in the labour market at its upcoming meetings”.
Clearly then, it would not have been pleased to see the unemployment rate in Australia pop up to 5.2%, though there may have been some comfort in another month of robust job creation, with a headline 28k boosting annual jobs growth to 2.6%, and full-time jobs up 2.9%yr.
However, rate cut expectations were reinforced by a worrying slide in the employment index of the Apr NAB business survey and another quarter of sluggish wages growth, while this weekend’s Australian federal election adds to the uncertain outlook. Polls point to an 80% chance of the Coalition government losing power to Labor after 6 years but perhaps relying on cross-bench support in the Senate, adding to uncertainty early next week.
On Tuesday we see the minutes from the May RBA policy meeting but the key for AUD should be 45 minutes later when RBA Governor Lowe speaks on the “Economic Outlook and Monetary Policy.” Traders will be watching this speech for any guidance on how quickly rates will be cut, with money markets fully pricing a move by July and 80% for June.
The Australian dollar has fallen 2.2% so far this month and is the worst performing G10 currency over that period. However, it’s not been all bad news for the A$ outlook. The price of iron ore has continued surging towards $100 per tonne, a level last seen in May 2014. Some analysts have been talking about a move through $100 to $110 as stockpiles of iron ore in China fall as a result of the tailings dam collapse in Brazil in February slashing global supply.
There was also a glimmer of hope on trade wars as the Trump administration reportedly delayed a decision on auto tariffs for 6 months (it had been due by tomorrow). However, the US did move this week to blacklist Huawei, a move that bans the company from acquiring components and technology from US firms without government approval.
The ratcheting up of tariffs on Chinese goods, the retaliatory tariff increases by China and this action on the Huawei have materially hardened the dialogue between the two superpowers. Consequently risk and growth sentiment are likely to be suppressed in the near term. This is a weight on AUD/USD though whether the pair tests the 0.6800 area probably depends more on what Governor Lowe has to say.
Event risk: Australia federal election (Sat), Japan Q1 GDP (Mon), RBA May meeting minutes, RBA Governor Lowe speaks (Tue), NZ Q1 retail sales, UK Apr CPI, FOMC May meeting minutes (Wed), India election results, European Parliament elections commence (Thu), Japan Apr CPI, UK Apr retail sales, US Apr durable goods orders (Fri)
