HomeContributorsFundamental AnalysisAussie Dollar sinks to a 2 month low

Aussie Dollar sinks to a 2 month low

The Australian dollar took a pounding this week as the US dollar made a big comeback, key commodity prices fell and RBA rate cut talk picked up.

Aussie dollar sinks to a 2 month low

Earlier this month the Aussie dollar was rebuffed as it tested 74 cents, a 2 year high. But the past week has produced a genuine correction, with the Aussie falling for 5 days in a row to just above 70 cents, its lowest levels since late July.

Admittedly a good part of this fall is due to a stronger US dollar. The greenback’s value against a basket of major currencies reached 2 month highs this week, including gains against even safe haven currencies the Japanese yen and Swiss franc.

The US dollar has been finding support from European Central Bank officials expressing concern over a strong euro, an expanding second wave of virus cases in Europe and confusing commentary from Federal Reserve officials which indicated somewhat less generous monetary policy settings in future.

The Aussie is down about 3% against the US dollar over the week and it has also fallen against the likes of the euro and the British pound. Such price action is not unusual when equity markets are under pressure, given the Australian economy’s sensitivity to global growth.

Still, there are local sources of pressure on the Aussie as well. On Tuesday, RBA Deputy Governor Debelle was quite cautious about the outlook for the Australian economy, warning that despite the stronger than expected August labour force survey, unemployment was likely to rise.

Debelle also spoke about the RBA’s options for further monetary easing. Following the speech, Westpac changed its view on the outlook for RBA policy. We now expect that at its 6 October meeting, the RBA will cut both its overnight cash rate and its target rate for the 3 year government bond from 0.25% to just 0.1%.

The Aussie dollar and market interest rates both fell in response to Westpac’s new view, though the RBA is still not attracted to the idea of negative interest rates, which limited the damage to the currency.

This week has also seen a pullback in commodity prices. Benchmark iron ore has dropped $15 over the past 10 days to $114 per tonne. The gold price has also tumbled though coking coal and copper are holding up.

Australia should continue to record trade surpluses for some time, with resources exports strong and demand for imports such as motor vehicles weak. Of course international tourism remains shut down and revenue from international students in Australia has fallen by 50% this year.

Australia’s calendar in the week ahead is unlikely to have much market impact, including August building approvals and private credit, then the final reading on August retail sales, after the preliminary survey this week showed a sharper than expected decline, following a strong reading in July.

As a result, the Aussie dollar will look to offshore markets for inspiration. Daily coronavirus cases will be watched in hot spots such as the UK which tightened social restrictions this week. And in the US, while the data calendar is fairly low key, politics will generate daily headlines, especially around the first presidential debate.

Event risk

Western Australia holiday (Mon), US Sep consumer confidence (Tue), Aust Aug building approvals and private credit, China Sep manufacturing and services PMIs (Wed), China National Day holidays (Oct 1-8 inclusive), Japan Q1 Tankan business survey, US Sep manufacturing ISM survey, US Aug personal income & spending (Thu), Aust final Aug retail sales, Eurozone Sep CPI, US Sep employment report (Fri)

Westpac Banking Corporation
Westpac Banking Corporationhttps://www.westpac.com.au/
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.

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