Aussie dollar trades in thin range just above key support – AFEX Monday update – October 22, 2018

It was a very quiet week for the Australian dollar, trading in a narrow 0.0072 range, the lowest weekly range since 2002. Continued volatility in equity markets was largely ignored in the currency market, which instead focused on economic releases that were mostly in line with expectations.

In summary, firstly the US Federal Reserve meeting minutes. The general theme was continued optimism that should see the Fed maintain its current rate hike trajectory.  Whist individual voting member forecasts were mixed, the majority see rates rising above 3.0% as they look to counter the enormous economic stimulus in play from Trump’s tax cuts and record low interest rates.

In news locally, the official ABS unemployment rate hit 5.0%, the lowest level since 2012. Whilst there is conjecture as to the accuracy of the ABS measure – the latest Roy Morgan real unemployment figure shows Australia unemployment of 9.4% and under-employment of 8.4% in September, currency traders still take comfort from seeing positive official releases.

In China, officials reported the weakest annual GDP release since 2012. This comes as the Chinese yuan pushes closer and closer to the psychological 7.000 level against the USD, where it hasn’t traded since 2008.

To put the yuan’s recent depreciation in perspective, Friday’s close at 6.9290 is around 11% higher than this year’s lows at 6.2419. This is important for the AUD which tends to trade as a proxy for the Chinse yuan due to the Australia dollar’s far greater liquidity.

Overall these announcements did impact the AUD, causing it to trade quite erratically within the tight range. It was simply a matter of the positive US and negative Chinese news being offset by the positive Australian news, balancing each announcement out.

Looking ahead at the calendar and this week appears quite thin in terms of major economic releases. The highlight being US advanced GDP on Friday night.  Politically the market will assess the Wentworth bi-election results, where at the time of writing on Sunday evening it appears as if Independent candidate Kerryn Phelps will win the count, having polled a 19% swing against the incumbent Liberal seat, vacated by ousted PM Turnbull.  The large swing against the Liberals could potentially be a precursor to what might happen at the next federal election in 2019.  A change in political guard is usually a negative for the country’s currency, so it will be interesting to see how the AUD fares at the open.

Traders will also keep a close eye on China, with any further yuan depreciation likely to weigh on the AUD also.

0.7118 was the closing price for AUDUSD on Friday. A break through 0.7090 and the support of 0.7040 comes back into play.  This level held 4-times over the past month, but with the majority of economists forecasting the Aussie dollar to trade below 0.7000, the weight of the market could prove too much and see 0.7000 tested sooner rather than later.

In other currencies, the AUDNZD closed last week at the lowest level in 4-months. NZ inflation printed at 0.9% quarter-on-quarter and 1.9% annually, up from 1.5% annually and 1.1% annually at the past two quarterly reads.

Given the Reserve Bank of New Zealand’s recent pessimistic views on the NZ economy and subsequent depreciation of the NZD, this release has pleased the market and given much needed support to the kiwi.

AUDNZD touched 1.0795 at the close on Friday, almost 4-cents lower from the highs in August at 1.1175. With momentum in favour of the kiwi and politics likely to weigh on the Aussie in the short-term, there could be further downside in store for this currency pair and a push towards the June lows at 1.0658 wouldn’t surprise.

Europe will also be in focus this week with key Purchasing Managers Indices reported ahead of the European Central Bank meeting on Thursday. There’s been much recent talk about the ECB’s tapering of its quantitative easing program and whether the central bank can afford to fully taper at this time.

Italy is also in the headlines and continues to weigh on markets as its budget deficits mount and ratings agencies ponder a junk rating on its bonds.

The EURUSD hovered just above 1.1500 at the close on Friday. Any negativity from the ECB could put strain on the EUR going forward.  AUDEUR closed at 0.6181, up slightly from recent three-year lows at 0.6115.

Across the channel and Brexit negotiations continue although there is still much uncertainty over the Ireland-Northern Ireland border. Theresa May could potentially cave in to EU demand on this issue, although her conservative government may struggle to approve this concession.

GBPUSD has traded wildly in recent time, bid higher when there is Brexit positivity and dumped quickly on any uncertainty. Most likely it will continue to trade in this manner over the coming weeks.  AUDGBP closed at 0.5442, up from the 0.5341 low recorded on the 11th of October.

James King
Head of FX Dealing. AFEX

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