The Aussie was thrown back into the losers’ pit last week thanks to a lot of uncertainty over China’s economy. Will we see the same trends this week?
CPI reports (July 25, 1:30 am GMT)
Australia’s consumer prices rose by 0.4% in Q1 2018, missing estimates of a 0.5% growth. On an annualized basis, prices retained their 1.9% growth when markets had expected them to increase by 2.0%.
The Aussie spiked lower at the release, as the numbers support the RBA members’ hints that there’s “not a strong case for a near-term adjustment in monetary policy.”
This week analysts are expecting a slight bump from 0.4% to 0.5% in Q2’s quarterly reading. They aren’t expecting the RBA’s trimmed mean CPI to move from its 0.5% reading, however.
A much stronger reading could nudge the RBA to move away from its neutral bias, but don’t bet the farm on it. After all, the central bank also has its eyes on other risks. Which brings me to my next point:
Risk and dollar sentiment
We know that the Aussie’s price action was also heavily influenced by gold trends and overall risk appetite.
This week pay attention to a possible escalation of a CURRENCY war. If you recall, the Donald has done damage to the dollar after criticizing the Fed’s interest rate hikes, while the People’s Bank of China (PBoC) had lowered its yuan mid-point fix for consecutive days last week.
Uncertainties relating to the world’s two largest economies can greatly affect export economies like Australia’s so make sure you don’t miss any relevant headlines!
Last Week’s Price Review
The Aussie finally became part of the winner’s club last week after five consecutive weeks of being a net loser.
Sadly for the Aussie, it was thrown out of the winner’s club this week and is currently the third biggest loser of the week (as of 6:00 am GMT), thanks to falling gold prices, a stronger U.S. dollar, a weaker Chinese yuan, some risk aversion, and concerns about China’s growth prospects due to the ongoing trade spat between the U.S. and China.
The Aussie showed weakness right from the get-go, thanks to falling gold prices and the prevalence of risk aversion on Monday.
Risk appetite briefly returned and gold prices turned higher temporarily during Tuesday’s Asian session, which allowed the Aussie to lick its wounds.
Unfortunately for the Aussie, risk aversion returned during Tuesday’s London session and gold resumed its slide, so the Aussie was forced to resume its own slide as well.
As a side note, the RBA’s latest meeting minutes were released during Tuesday’s Asian session, which caused the Aussie to dip slightly, likely because the RBA had a cautious tone and reinforced the idea that the RBA won’t be hiking anytime soon since the minutes noted that (emphasis mine):
“The low level of interest rates was continuing to support the Australian economy. Inflation remained low, reflecting low growth in labour costs and strong competition in retailing.”
“[T]here was no strong case for a near-term adjustment in monetary policy. Rather, the Board assessed that it would be appropriate to hold the cash rate steady and for the Bank to be a source of stability and confidence while this progress unfolds.”
But as mentioned earlier, risk appetite made a brief comeback during Tuesday’s Asian session, which gave the Aussie some respite, so the release of the RBA’s meeting minutes was essentially a dud.
Moving on, risk sentiment switched back to risk-on during the U.S. session, thanks to Fed Chair Powell’s speech. Gold prices, meanwhile, began to trade sideways, so the Aussie’s downhill trek began to lose steam.
Incidentally, Powell’s speech boosted the Greenback, but steady gold prices and the risk-on vibes likely helped the Aussie to resist the Greenback’s advance.
Risk-taking persisted into Wednesday’s Asian session, but the Aussie resilience against the mighty Greenback finally began to crack and most Aussie pairs began to tilt to the downside. It probably didn’t help that gold prices began to fall because of the Greenback’s strength.
The Aussie would regain its mojo later on when the Greenback’s strength faltered during Wednesday’s U.S. session, thanks to not-so-upbeat U.S. data and cautious-sounding remarks from Fed Chair Powell.
And as icing on the cake, Australia’s jobs report surprised significantly to the upside during Thursday’s Asian session, which gave the Aussie a strong bullish push.
However, the Greenback eventually regained its footing, gold prices moved lower again, and risk aversion made a comeback during Thursday’s London session, so the Aussie was gutted.
Concerns relating to China’s growth prospects were also very likely weighing down on the Aussie on Thursday since there were rumors floating about that China may try unconventional easing measures, namely by introducing incentives to boost the liquidity of Chinese commercial banks and helping them to increase investment in bonds. In other words, instead of the central bank buying bonds directly (i.e. a QE program), China will let commercial banks do it.
Moreover, trade-related concerns may have also been a drag on the Aussie since the Aussie got a noticeable bearish kick while Chinese Foreign Ministry Spokesperson Hua Chunying was holding a presser.
As for specifics, Hua Chunying lambasted Larry Kudlow, President Donald Trump’s top economic advisor, by saying that:
“[R]ight in front of everyone’s eyes, the US went back and forth and ate its own words, and the US official still dared to call white black and tried to shift the blame onto China. That honestly entails some extraordinary imagination and is just preposterously shocking.”
This is in response to Kudlow’s earlier comment that:
“I don’t think President Xi at the moment has any intention of following through on the discussion we made and I think the president is so dissatisfied with China on these so-called talks that he is keeping the pressure on — and I support that.”
And that’s not the end of it since Hua Chunying escalated the trade war (of words) when she said that:
“China’s position and attitude on the trade issue with the US is consistent and clear … The US, however, holding high its baton, has been rudely threatening and coercing China, and brazenly engaging in flip-flopping and backpedaling, which is the direct and root cause for the escalation of the situation. The US should keep in mind that today is the 21st century with a high level of economic globalization, and it is China they are dealing with.
Anyhow, the Aussie kept sliding for a while until it finally found respite when gold prices jumped and the Greenback tanked after Trump said during a CNBC interview that:
“I’m not thrilled [with the recent rate hikes].”
“Because we go up and every time you go up they [the Fed] want to raise rates again. I don’t really — I am not happy about it. But at the same time I’m letting them do what they feel is best.”
“I don’t like all of this work that we’re putting into the economy and then I see rates going up.”
China further devalued the yuan during Friday’s Asian session, though, spooking the markets in the process, so the Aussie got a bearish slap.
The Greenback is still broadly in retreat, however, which is likely why gold prices and the Aussie are trying to end the week by turning higher.