The effects of a strong Aussie begin to show

For months now the RBA have highlighted their concern about a strong Australian dollar and we are now seeing the effect this is having on the Australian economy.  The stronger Australian dollar has caused manufacturing costs for car manufacturer General Motors to rise, and this coupled with a small domestic market encouraged the firm to stop producing cars in Australia from 2017. The US car producer Ford announced that it would stop making cars in Australia earlier on this year, and the new move from General Motors now poses a threat to the car industry which has increased the importance of retaining Toyota’s business.

Prime Minister Tony Abbott is holding talks with car producer Toyota in an attempt to convince the firm to continue to manufacture motors in Australia and prevent potentially thousands of job losses. This emphasizes the strain a strong currency is having on business costs, making foreign made cars more appealing to consumers. After the numerous failed attempts at talking down the Australian dollar, comments from RBA Governor Stevens regarding intervention finally got the ball rolling. More Aussie weakness is needed, however with the GBPAUD rate currently at 1.83, the rate is moving in the right direction.

Sasha Nugent

Currency Analyst

Caxton FX

RBA Governor Stevens takes the first steps in weakening the Aussie

After months of complaining about an “uncomfortably” high Australian dollar, RBA Governor Stevens has finally said enough to ease Aussie momentum.

The RBA’s latest monetary policy minutes, revealed that although the effects of the last rate cut are still filtering through the economy, the committee haven’t closed the door on lowering rates further. The central bank has raised the issue of a persistently strong Aussie and the potential problems this can cause for the recovery. Consequently, there have been several attempts to talk down the AUD, but this has failed to make any lasting impact. The prospect of looser monetary policy has not shaken the markets enough to encourage significant Aussie weakness.

This morning, RBA Governor Stevens claimed that he is ‘open minded on intervention to lower AUD’ and this comment got the ball rolling. GBPAUD opened at 1.7253 and has jumped over two cents to 1.7470 during trading today. The fact that Governor Stevens is ‘open’ to intervention suggests the RBA are serious about the currency’s strength, and could act to weaken the Australian dollar if need be.

Sasha Nugent

Currency Analyst

Caxton FX

Reserve Bank of Australia cuts growth prospects

The news as far as the aussie dollar has been concerned this week has been remarkably positive. We have to hold our hands up and say that we were expecting the RBA to cut its 3.25% interest rate again at its meeting this week, though we did warn that it was an incredibly close call. On top of this, data revealed that 10.7 thousand jobs were added to the Australian labour market, which was away ahead of expectation. The aussie unemployment rate also unexpectedly remained 5.4%.

What followed all this was last night’s RBA monetary policy statement. In it, the RBA warned that the aussie mining boom will peak earlier and at a lower level than has previously been thought. It was previously thought that the mining boom would peak at 9.0% of GDP, expectations are that it will now peak at 8.0%. The central bank also complained further about the strength of the Australian dollar (change the record!)and proceeded to downgrade aussie GDP projections for this year from around 3.00% to around 2.75%, though admittedly we might have expected this downgrade to be more drastic.

The RBA stated that the current interest rate is appropriate and that past rate cuts are still filtering through and benefiting the Australian economy. The statement also sounded confident that the Chinese economy has stabilised, anticipating a gradual recovery in growth from here.

We suspect that Governor Stevens may be getting ahead of himself with respect to Chinese growth and Australian growth. While this week’s strong aussie jobs data may see the RBA delay a rate cut in December, we’d be surprised if we had to wait past January for another cut. 

Richard Driver,

Currency Analyst

Caxton FX

What can we take from the RBA minutes?

Last night’s Reserve Bank of Australia minutes were unsurprisingly dovish given the downturn in Chinese and global growth over the past few weeks and months. The minutes explained the key drivers behind the central bank’s decision to cut interest rates at its meeting earlier this month. As well as slower growth in Asia, lower commodity prices and weaker domestic growth also topped the RBA’s list of concerns. The bank is now envisaging a peak in resource investment, sooner and lower than initially estimated.

An ongoing decline in coal coking prices is alarming the RBA and there are reports of early closures of older mines and low take-up of new resource projects. The mining boom has been a huge driver of Australian growth in recent years and these tell-tale signs of decline are bad news for the economy and the AUD as a result. Weakening demand from the eurozone is clearly taking its toll on Chinese growth and the knock-on effect is weaker demand for Australian commodities.

The RBA is also very concerned about the aussie labour market. We have had a decent Australian employment update this month but the unemployment rate has climbed up to two-year high of 5.4% and the central bank is anticipating a deterioration in the coming months, in no small more part due to projected mining sector weakness. The mining sector has masked underlying weakness in the labour market for a while now, the truth should now emerge. 

Australian Treasurer Swan indicated last month concerns over a fall in Australian tax receipts, while the Government is committed to returning to a budget surplus. The difference is being made up in budget cuts, which will also weigh on Australian growth in the coming months.

Amid all these downside risks to Australian growth and the noticeably dovish tone in these latest RBA minutes, we are expecting another interest rate cut at the RBA’s next meeting in November. October 24 brings a key quarterly Australian inflation figure but an upside surprise does seem very unlikely and the path should be clear for another rate cut. This leaves plenty of scope for AUD-weakness in the coming weeks and months. 

Richard Driver

Currency Analyst 

Caxton FX

RBA signals interest rate cuts in October

The Reserve Bank of Australia released the minutes from its September meeting last night and the Australian dollar has since weakened. This is because the minutes were probably the most dovish we have seen from the RBA in six months, suggesting a cut to its 3.50% interest rate could be just around the corner. To say the RBA has signaled a move may be an overstatement but the we are hearing the hints loud and clear.

The minutes included the assertion that "the current assessment of the inflation outlook continued to provide scope to adjust policy in response to any significant deterioration in the outlook for growth." This is a telling statement.

Australian data has not overall been particularly positive of late but it is hardly reason for the RBA to panic. Indeed, the RBA appears to be confident that domestic growth is on the right path. Investment looks to be positive for the rest of the year, consumer confidence is up and the unemployment picture is relatively stable, as shown by the recent fall to 5.1%.

Rather, evidence of renewed weakness in the Chinese economy is a major driver. Linked to this is the second issue on the RBA’s mind, which is declining commodity prices, in particular iron ore and coal prices. It’s not just China that the RBA is concerned with either; data from the eurozone and the US is also pointing to a further global slowdown.

So the bank has changed from a neutral tone to an easing bias. The comments reflect those within the RBA’s March meeting, which was followed by a 0.50% interest rate cut in April. We don’t expect a 0.50% cut in October, but we do expect a 0.25% cut, and then another in November or December. The Fed and the ECB’s recent monetary policy decisions will surely aid global growth eventually but this will take time to feed through and results won’t come soon enough for the RBA.

Richard Driver

Currency Analyst

Caxton FX

Aussie dollar is struggling but tonight’s RBA should spare it another blow tonight

The AUD has suffered a 5.0% drop against the pound in the past month, as well as a 3.6% drop against a broadly weak US dollar. Weak Chinese data added to the negative regional tone evident in the Asian markets at present. The Chinese manufacturing sector contracted in August for the first time since November 2011 and by more than was expected. All is not well with Australia’s key export partner and data has been poor on the domestic front also. Data this week has revealed that Australian retail sales contracted by an alarming 0.8% in July. Understandably, the aussie dollar has fallen further out of favour as a result.

A key factor which is adding pressure to the AUD is the fact that iron ore prices have plummeted of late, in line with the deteriorating growth and demand outlooks for China. Interestingly, the Reserve Bank of Australia’s McKibbin has commented recently that “things have changed a lot in the last month…I now have further downside risks in my forecasts for interest rates.”

So what is the Reserve Bank of Australia going decide at its monthly meeting tonight? Well, ahead of an Australian GDP figure which is likely to indicate growth of around 0.9% during the second quarter, it is hardly panic stations. This is very backward-looking data though and the truth is that economic conditions in Australia have really declined in the third quarter. Nonetheless, very few will be expecting the Reserve Bank of Australia to cut its 3.50% interest rate tonight, and we are not among them.

It seems quite clear that the central bank is very much in ‘wait and see’ mode. RBA Governor Stevens recently emphasised that is “too early…to tell how much difference the sequence of decisions to lower interest rates has made to the economy." The RBA will be concerned with the Australian economy’s recent underperformance but not overly surprised, as downside risks to near-term growth were noted in August. Another rate cut is wholly possible, if not probable in Q4 (which could be brought forward if the Eurozone crisis drastically deteriorates), but the RBA will remain on hold for tonight. However, this is unlikely to provide the AUD with much relief.

Richard Driver

Currency Analyst

Caxton FX