Monthly Economic Review: Australian Dollar

Since we’re jumping into a new quarter, it’s time for us to have a quick rundown of recent data from across the globe.  Today’s quick review is on the Land Down Under: Australia.

Trade Activity

Australia’s latest trade figures showed an increase in their trade deficit to -A$1.26B in March vs. -A$0.98B in February. Besides falling global energy prices, a chuck of that deficit can be attributed to what’s going on with one of its biggest trading partners: China.
miner

Recently, the focus has been on falling iron ore prices, due to less demand during the Chinese Lunar New Year holiday, rising surpluses, and more recently, possibly driven by China’s actions to support their own iron ore miners through tax cuts.  These issues can not only bring on a continued drop in iron ore prices, but like the recent drop in oil, a round of iron ore industry layoffs or even companies failing.

We can also see pain in Australia’s export coal industry (7.3% drop year-over-year) as Chinese regulators tightened up on the coal industry to help reduce it’s pollution problems. With China setting growth targets to 7.0% (it’s slowest pace in 24 years), the expectation is for Australia’s trade sector to continue to struggle, at least in the short-term.

Employment

The February read of Australian employment conditions showed an increase of 15.6K net jobs versus a 15K forecast and a -12.2K decrease in January. Also, the unemployment rate unexpectedly ticked lower to 6.3% from 6.4% forecast/previous.  This kind of improvement in the unemployment rate usually calls for folks to start poppin’ bottles and breaking out their party hats, but we shouldn’t break out the champagne just yet because as the saying goes, the devil is in the details.

Unfortunately, the labor force participation rate (the percentage of working-aged, able bodied citizens who are 1. working or 2. looking for work) declined in February from 64.8% to 64.6%. This means that the reason we saw the unemployment rate drop was due to the number of people leaving the work force, which is usually a sign of job market issues. And given the problems we’ve seen recently with international trade above, it looks like we may not have seen the top yet in the recent trend higher in the unemployment rate.

RBA Monetary Policy Bias

We just got the latest monetary policy decision from the Reserve Bank of Australia this week, holding the main cash rate at 2.25%.  There was pressure on the RBA to cut interest rates with the growing trade deficit, and while they defied the expectation this time, it’s widely expected they will cut again this year. RBA Governor Stevens mentioned that the Aussie dollar remains overvalued, and that .7500 is the appropriate level where growth can be sustained for this export driven economy, so it is likely the RBA will do anything (like interest rate cuts) to get their currency to where they feel it needs to be.

Overall, the data and monetary policy is pointing to another rate cut by the RBA.  Do you think that .7500 will be the bottom for the year or will the Aussie break even lower?

 

  • ForExchange

    Hi Forex Gump,

    in case you are right then it is the best time to buy USD now as the AUD showed a lot of strength in the past days.

    What are you trading currently?

    FE

    • None at the moment, waiting for potential corrections on the dollar pairs to see if I can jump in the long-term trends. How about you?

      • ForExchange

        I like NZD/CHF the most also for long-term trading. Besides that S&P is always interesting for me.

  • baigaisvecis

    Another interesting fact is the big divergence in RSI and price action. RSI has made 4 new high lows while price keeps going south. Take a look at the daily chart. Technically looks like a pretty nice bullish potential if price breaks above 0.7900.

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