Fundamental Analysis: Aussie Dollar Flat After Mixed Minutes

The Australian dollar has been mostly stable against major currencies today after the RBA’s latest minutes were not as negative as expected. Commodities have also given some support to AUD. Conversely, expectations for a rate cut before the third quarter of 2019 remain high.

AUDUSD seems to have halted its downward movement for now at around 68.8 US cents. This is very close to this symbol’s 11-year low. The Aussie dollar has also been flat against the yen today at about ¥76. Volatility was a bit higher for EURAUD, though, with this pair holding above the important area of A$1.62 at the time of writing.

Expectations for rates scuppered AUD

The increasing likelihood that the Reserve Bank of Australia’s (RBA) next significant shift in rates will be downward has been very negative for the Australian dollar. Apart from trade disputes affecting China, Australia’s largest trade partner, domestic data has mostly been weaker. Annual inflation at 1.3% in particular remains significantly below the RBA’s target of 2-3% on average.

These factors have resulted in more dovish statements from Australia’s central bank this month. Until fairly recently, the cash rate of 1.5% made AUD a reasonably good candidate for carry trading. Now, though, it appears that the differential with the USA is likely to remain 0.75-1%, possibly more, against the Aussie dollar into at least the start of next year.

Political pressure has added to the downward forces on AUD this week. Australia’s Prime Minister Scott Morrison met with the RBA’s Governor Philip Lowe this morning to discuss calls for looser monetary policy. Although there are few details of the meeting, high level discussion with the government on cutting rates has hurt sentiment on the Aussie dollar.

Commodities providing support and RBA less negative

Standing against this pretty bleak picture, the RBA has been somewhat more positive so far this week. The bank’s minutes yesterday morning were not nearly as negative as some analysts and traders had expected. In fact, the bank pointed to strong employment data from many advanced economies including Australia. The statement also touched on risks to the lukewarm outlook for the domestic economy coming from both directions.

Prices of commodities have also given fairly strong support to the Australian dollar this week. Higher prices for iron ore (based on China’s Tianjin 63.5% import benchmark) and coal tend to be good for AUD. This is because of these minerals’ large share in Australia’s exports overall, about 30% in 2018 – among the highest of any country.

The price of iron ore (Tianjin 63.5%) has reached a five-year high this week. Tianjin 63.5% was worth US$104 per tonne this morning, a gain of nearly 45% this year so far. Furthermore, iron ore futures gained over 3% this morning to ¥727.50 on the Dalian Commodity Exchange. This is the highest price ever recorded since the launch of these contracts in 2013.

Iron could be key this week

Recent sudden gains in the price of iron ore are very important for AUD’s direction this week. If Tianjin 63.5% consolidates above 100 USD/MT, a rally could be in view for the Aussie dollar.

This is a slow week of data from Australia. CommBank’s three PMI releases are due at 23.00 GMT tonight. Service and composite PMI are expected to improve by about 0.5 each. Conversely, the consensus indicates that manufacturing PMI might decline by about the same. However, traders should be aware of a number of major releases from the eurozone tomorrow. These could cause very high volatility for EURAUD.

It might go without saying that the Aussie dollar is likely to react strongly to more major news of trade wars. Lesser events such as more American threats to blacklist Chinese companies could also lead to losses for AUD.

Against the odds, AUD might recover slightly

Despite the negatives, many of the key fundamentals for the Aussie dollar are fairly strong. Combined with recent oversold conditions on the technical side, some small gains for AUD are possible in the rest of the week.

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