Under pressure for most of the week and falling to 13 month lows, the Aussie dollar did end the week on a stronger note pairing all of its losses to end the week marginally higher.
Sitting below 0.7350 for the first time since May 2017, weak US data flow and surging crude oil prices in the twilight of the week saw AUDUSD rally some 1.25%, commencing this week at 0.7340.
Ongoing trade ructions between the US and China were the key driver for the past week – the negative effects on global risk sentiment never more apparent than in foreign exchange markets. A proxy for global growth and the health of the Chinese economy, the Aussie dollar will continue to remain under significant pressure should the world’s two largest economies fail to find some common ground at the negotiating table.
The EU also not immune from the US’s aggressive stance as Trump suggested the US would slap a 20% tariff on all EU manufactured cars.
As global financial markets hold their collective breath that an all-out trade war is avoided, all eyes will be on the ongoing negotiations. The current state of play as follows:
- The US will impose tariffs on $34bn of Chinese imports from 6 July onwards.
- An additional $16bn will be imposed once the range of products have been determined
- Trump has further requested that an additional $200bn of tariffs be imposed should China retaliate.
- With a further $200bn levied if the Chinese authorities push back with further counter measures.
As the Aussie forms a near term base around the 0.7350 mark and pauses to catch its breath, avoiding the above outcomes will be key for the currency to avoid further falls into the low 70’s.
On the domestic front, last week’s RBA minutes also served to weigh on the local currency as the minutes removed the previous reference to the next move in rates likely being higher. Economists, traders and market commentators have been noticeably scaling back their expectations for both the timing and frequency of RBA rate hikes with no one expecting a 2018 hike, with 2019 also looking increasingly unlikely.
To put it simply, Australian economic growth is meandering, wages growth is sluggish and households are dialling back spending as debt levels are high and house prices soften.
So what we have at the moment is a perfect storm for the Aussie dollar – a central bank not raising rates any time soon whilst the US Federal Reserve continues to hike. Add to this the growing concerns that a trade war is brewing and the odds seem stacked against the currency.
In a very quiet week ahead on the domestic data front, aside from the ebb and flow of trade headlines and tweets, currency markets will seek direction from US data, with this week’s key release being Personal Consumption Expenditure – The Fed’s preferred inflation measure.
Expected AUDUSD range for the week: 0.7360 > 0.7480.