AUD tumbles as the RBA eases further
The Australian dollar stood amongst the worst performers on Tuesday morning following the Reserve Bank of Australia’s decision to cut the cash rate target by 25bps to record low 0.75%. The cut itself wasn’t a surprise as most economists anticipated the move; however, the language was much more dovish than expected. The Aussie gave up 0.65% against the greenback and fell as $0.6701 during the Asian session before stabilising around 0.6705. Governor Philip Lowe left the door wide open for further monetary easing if needed. Therefore, given the deterioration in the job market and the grim growth outlook, the RBA would most likely trim the cash rate down to 0.5% before the end of the year.
From a technical standpoint, AUD/USD is approaching the key 0.6680 support area that has been tested three times since the beginning of August. A break of this area to the downside would open the road toward 0.66 (psychological level and bottom of the downtrend channel). Given the slowdown of the Chinese economy – to which Australia is heavily exposed as roughly 40% of its exports go there – and the ongoing currency war, we anticipate that more pain is lying ahead for the Aussie
EUR in despair amid weakening data
The recent series of negative data releases hit the single currency hard, which trades at May 2017 range against the greenback, pointing to a quarterly drop of over -4%. Not only does the European Central Bank limited room of action for monetary easing plays a major role in that trend, but also the publication of poor manufacturing PMI data earlier last week as well as fears of a recession in the German economy. Investors’ attention to Eurozone inflation gauge as well as WTO ruling on EU aircraft subsidy should also strengthen the decline in EUR.
The sudden departure of ECB Executive Board and Governing Council member Sabine Lautenschlaeger following the ECB announcement of a resumption of its asset purchasing program already had its deal of headlines as it confirmed the existing discord among ECB Board members regarding monetary policy, with one third of its nineteen members opposing their vote during 12 September 2019 meeting. Furthermore, trade shocks in Germany remain a key impediment in the bloc, as shown by the release of German manufacturing PMI at 41.7 for September, an historical low while inflation came lower at 1.20% (prior: 1.40%) despite a labor market appearing tight at first sight although the ifo employment barometer indicates a rather weak labor market dynamism for September. Following the issue of Eurozone September CPI data, with both headline and core metrics given at 0.90% (prior: 1%) and 1% (prior: 0.90%) respectively, the EUR is expected to stay under pressure during the course of the week, with upcoming producer prices and retail sales on Thursday likely to disappoint as well. In the meantime, a WTO ruling this week that would give reason to US authorities to slap tariffs of up to $11 billion on EU products should not bode well, as retaliatory measures would probably be taken, paving the way to further tit-for-tat trade actions.
EUR/USD is currently trading at 1.0896 (-5% year-to-date) after closing its biggest quarterly decline since Q2 2018. Approaching 1.0880 short-term.
