AUD Feeling the Weight of Darkening Global Economic Outlook
AUD
The AUD trades significantly lower across the board except for against the Kiwi, due to an unimpressive 50bps rate hike by the RBA which left AUD bulls wanting more. Asian equities were almost unchanged on Tuesday with the Hang Seng down 0.1%, the Nikkei rising 0.03%, and the ASX falling 0.4% to a six-week low. A mixed bag for commodities with Gold flat, Silver losing out -0.3%, Iron Ore the biggest loser dipping -0.9%, however Copper managed to advance 1.3%. The Reserve Bank of Australia delivered its fourth consecutive half-point hike, lifting the cash target rate to 2.35%. Although it signaled that its monetary cycle is not complete, as the rate approaches neutral (2.50%), the RBA may slow the pace. The market is pricing in about slightly more than a 75% chance that the next move is 25bp. The Australian dollar initially extended the recovery that began yesterday, before meeting a wall of sellers who drove it back to yesterday's lows. China remains almost completely isolated from the rest of the world as it adheres to a strict Covid Zero policy, with flights in and out of Asia’s biggest economy even lower than when the first cases of the virus were discovered in Wuhan in early 2020. Australia reports Q2 GDP figures at 11:30am this morning with a forecast of 0.9%, but wages and consumption may be the key for the RBA going forward. Looking ahead, governor Lowe's speech tomorrow is the next key event for expectations, which may give clues as to his outlook for the next policy meeting on October 4.
USD
AUDUSD took a hit last night, plummeting to almost two-month lows of 0.6725, before recovering slightly to trade at 0.6736 at time of writing. The NASDAQ closed -0.7% lower after earlier being down as much as -1.3% while the S&P 500 and the Dow Jones both finished the session -0.5%. Final Services PMI data came out of the US yesterday, missing forecasts of 44.3, coming in at 43.7. August survey data signaled a sharp and quicker decline in business activity across the US service sector, according to the latest PMI data. The decrease in output stemmed from weak domestic and foreign client demand, as new orders returned to contraction territory. ISM Services PMI came out last night also, beating expectations of 55.4, posting at 56.9. Accommodation & Food Services indicated that we are "starting to see some cost pressures relief; the overall supply environment is healthy.” Unemployment claims will be released out of the US tonight, with expectations of 234k. Also, tonight FOMC members Mester and Brainard will discuss monetary policy outcomes, along with speech from Fed Chair Powell, which should be enlightening as to the direction he feels is necessary to stave-off inflation.
EUR
AUDEUR following trend for the downturn, dipping to one-week lows of 0.6790 before recuperating marginally to re-capture the 0.6800 handle at time of writing. Interestingly, a positive sentiment for European equities, with the CAC and the DAX gaining 0.2% and 0.9% respectively. In data out of the Eurozone, yesterday Germany reported a 1.1% decline in July factory orders, and the small upward revision to the June series (from -0.4% to -0.3%) offered little consolation. German factory orders have been falling since February. There is speculation that Russia could "weaponize" its uranium by only selling it for roubles, as it has for oil. The imbalance between consumers and producers is stark and appears to favor Russia and its allies. Consider that 3/4 of the nuclear power is generated in the high-income countries while Russia, China, Iran, and Pakistan account for a little more than 60% of the uranium ore. Separately, there have been reports for the better part of six months now that some Russian gas is coming back to Europe through China. Now, reports suggest some Russian oil is coming back via products through India. Looking ahead in data, we have Italian Retail Sales m/m, Final Employment Change q/q, and Revised GDP q/q – none of which are expected to move markets.
GBP
AUDGBP also a victim of the broad-based AUD selling, touching almost two-week lows of 0.5832 before improving slightly to trade at 0.5845 at time of writing. The FTSE gained 0.2% due to positive sentiment around the newly elected Prime Minister Liz Truss. The UK now has its fourth prime minister in slightly more than six years. Truss is not new as she has served in numerous ministerial posts for the last decade. Still a new cabinet will be appointed, and new initiatives sought. In this iteration, Truss may push for tax cuts and greater government involvement in the energy market. Meanwhile, in a little more than a week's time, the BOE will meet, and rather than moderate its hikes as recession looms, it may accelerate them. That was MPC member Mann's call in a speech yesterday. She said that "fast and forceful action was superior to gradual moves." When specifically asked about a 75 bps hike, she replied that "What we need to be doing is to make sure the medium-term inflation expectations don't drift." The swaps market has about an 82% chance of a 75 bp hike. A week ago, it was less than a 50% chance. The new government floated the idea of abandoning the 80% increase in household power prices that was supposed to start next month. It would cost the government around GBP 130B to pay for the increase to the power companies for the next 18 months. It will also suspend the green energy tax. Power companies seem the like the initiative, which would also avoid the windfall tax. The GBP 130B initiative by the new UK government to protect households from the surge in power costs helped lift sterling from 2.5-year lows. This evening in data, the Monetary Policy Report Hearing will take place.
NZD
AUDNZD bucked the trend, holding firm around yesterday’s open, trading at 1.1153 this morning. A quiet week across the ditch, with Manufacturing Sales q/q coming in tomorrow morning, looking to improve on its previous figure of 1.2%.