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Market Analysis

Fundamental Analysis: Small Gain for AUD but Rate Cut in View

June 03, 2019
BY Michael Stark

The Australian dollar has made a slight upward movement overall against many major currencies this morning. This comes ahead of tomorrow’s critical news from the Reserve Bank of Australia, which appears to be on track to cut the cash rate. Fundamental support for the Aussie dollar has come from high prices for iron ore and improving figures from China.

AUDUSD has risen amid volatility since Friday above the important area of 69 US cents. 69.5 cents now is a fortnight high. The Aussie dollar also made a smaller gain against the euro, with EURAUD at A$1.607. Meanwhile AUDJPY bounced this morning from the five-month low of ¥75.

Data and iron offering support

The most important positive factors for AUD so far this week have been better Chinese data and iron holding near recent highs. This morning’s Caixin manufacturing PMI came in at 50.2, slightly higher than the consensus. This indicates modest growth in Australia’s largest trade partner. Iron ore (Tianjin 63.5%) has held today near multi-year highs at around US$105 per tonne. The price of iron is important to the Aussie dollar because of the commodity’s role in Australia’s economy.

All eyes on the Reserve Bank

A majority of analysts expects that the Reserve Bank of Australia will cut its cash rate by 0.25% to 1.25% tomorrow at 01.30 GMT. This does appear to be the most favorable outcome of the meeting, but a cut is by no means guaranteed.

Recent job data from Australia seems to support the rationale for a cut. Both ANZ’s index of job ads and NAB’s business survey reported weakening in Australia’s employment market. This is one of the main areas that the RBA studies when deciding on rates. ANZ’s job advertisements figure this morning was particularly bad, indicating a decline of over 8%.

Conversely, there are some factors contraindicating a cut. The slowdown in Australia’s property market was significantly less pronounced last month. Prices were down less than half a percent in May on average, a year high for this indicator. Last month’s data from manufacturers was also reasonably positive. While growth has slowed, there is no suggestion yet of a contraction in Australia’s manufacturing sector.

Losses seem likely for AUD

It’s impossible to predict the RBA’s decision with certainty. Nonetheless, the most probable scenario seems to be a cut tomorrow morning. This in turn is likely to be a major negative for the Aussie dollar this week, leading to losses for AUD in most of its pairs. Even so, traders should be aware that the bank could give them a surprise by holding.

Trade the Aussie dollar with low spreads even during the biggest news.


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