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Market Analysis

Fundamental analysis: Aussie dollar sinks to 10-year lows

August 07, 2019
BY Michael Stark

The Australian dollar declined sharply in the wee hours GMT in the aftermath of a bigger than expected cut to rates in New Zealand. AUD had already been under pressure in most of its pairs due to heightened trade tensions. Standing against these negatives, Australia posted a new all-time record trade surplus of over A$8 billion. The RBA also left rates on hold at 1%.

AUDUSD touched lows not seen since 2009 this morning below 67 American cents. The picture was similar against other major currencies, with EURAUD moving above 1.674, the highest since summer 2015. AUDJPY also reached a 2019 low below ¥71.

RBNZ’s big cut shocks markets

There was no expectation whatsoever that the Reserve Bank of New Zealand might cut its cash rate by half a percent. 0.25% was priced in, but the stronger easing by the RBNZ is likely to put pressure on the Reserve Bank of Australia to cut its own cash rate further. As it stands, the base rate in the two countries is 1%, a record low in both cases.

Much of the negativity around the Aussie dollar over the past few days has come from the return to high tensions over trade. Donald Trump’s tweet announcing new charges on all remaining tariff-free Chinese products had a strong adverse effect on trade-sensitive currencies like AUD. The main reason for this is Australia’s high dependence on trade with China, particularly the former’s exports of raw materials like iron.

Meanwhile iron ore (Tianjin 63.5%) has retreated by about 18% from recent multi-year highs. The key raw material has moved down from over US$124/MT last month to about $101.50 in today’s Asian session. The prices of iron ore and coal are very important for the value of the Australian dollar because of the key role of these minerals in Australia’s exports. Around 30% of the total value of Aussie exports comes from iron ore and coal, one of the highest rates of any country in the world.

Some support from national trade data

In the middle of all the negatives, Australia posted a record trade surplus today. Balance of trade for June came in at over A$8 billion this morning, surging above the previous $6.2 billion. The figure is also dramatically higher than the expectation of a drop to about $5.7 billion.

Behind these data, Australia’s trade with China is booming. This might in fact be due to the trade wars between the latter and the USA. As it becomes more expensive for Chinese companies to trade with the USA, it seems natural that many of them are searching for alternative markets. Most notably, the gap between Australia’s imports from and exports to China is still widening in favour of exports.

Monetary policy statement in view on Friday

Certainly the most important news for the Aussie dollar in the rest of this week is Friday’s release of the RBA’s Statement on Monetary Policy. Due at 1.30 GMT, traders’ focus is likely to be on the following hot topics:

  • Trade disputes
  • Loosening financial conditions in New Zealand and elsewhere
  • Outlooks for employment
  • Australian national trade balance

Although any clear hint on the timing of the RBA’s next change to rates is very unlikely, it’s possible that one of the two cuts in the rest of the year might be priced out. Equally, the RBA might be cautious despite this morning’s excellent figure for trade balance.

Traders are also likely to study Chinese data in the rest of the week. The two key releases are July’s balance of trade at 3.00 GMT tomorrow and annual inflation for July at 1.30 on Friday. Although the latter’s set to remain stable, expectations suggest a decline of over US$10 billion in China’s trade balance.

Worst might be over for AUD

Based on fundamentals overall, the reaction to this morning’s news from New Zealand seems to have been excessive. Strong trade data from Australia could be the driver of a bounce for AUD, although this would depend on the RBA’s comments on Friday. In any case, traders should monitor key technical levels on charts with the Aussie dollar for more clues on direction.

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