The Aussie became part of the winners’ club last week, but it will soon be kicked out of the door again since the Aussie is currently THE biggest loser of the week (as of 7:00 am GMT).
As usual, the Aussie was taking some directional cues from gold prices. But like the last couple of weeks, there were other factors driving the Aussie’s price action since the Aussie is lagging behind all of its peers, but gold is poised to close out the week in positive territory.
And the main reason for the Aussie’s weakness this week is the FOMC statement, although the prevalence of risk aversion and the verbal salvos between the U.S. and China during this week’s WTO meeting also apparently dented demand for the Aussie.
The Aussie had a steady start, but it soon became clear during Monday’s morning London session that AUD pairs were diverging from gold prices since gold prices were tilting to the upside but most AUD pairs were tilting slightly to the downside.
And the apparent reasons for the divergence is that AUD pairs were weighed down by the risk-off vibes and the verbal spat between U.S. Trade Ambassador Dennis Shea and Chinese WTO Ambassador Zhang Xiangchen at the WTO meeting.
Risk aversion then prevailed during Monday’s U.S. session, so AUD pairs continued to diverge from rising gold prices.
The Aussie would finally see signs of broad-based demand during Tuesday’s Asian session, thanks to signs of returning appetite for risk and the RBA’s meeting minutes since the minutes gave a generally upbeat assessment of and outlook on the Australian economy:
“[T]he Australian economy had continued to perform well. GDP growth was expected to remain above potential over this year and next, before slowing in 2020 as resource exports were expected to reach peak production levels around the end of 2019. Business conditions were positive and non-mining business investment was expected to increase. Higher levels of public infrastructure investment were also supporting the economy.”
The minutes also repeated the RBA’s hawkish mantra that:
“[M]embers continued to agree that the next move in the cash rate was more likely to be an increase than a decrease.”
However, the minutes also repeated the RBA’s other mantra (the not-so-hawkish one):
“[T]here was no strong case for a near-term adjustment in monetary policy.”
Anyhow, risk aversion returned during Tuesday’s London session and then persisted throughout Tuesday’s U.S. session, so buying pressure on the Aussie quickly abated and most AUD pairs began to drift lower even as gold prices steadily traded higher.
Risk sentiment became more mixed and gold prices steadied during Wednesday’s Asian session, so AUD pairs began trading sideways.
And while risk-taking did get revived during Wednesday’s London session, the Aussie failed to attract buyers and AUD pairs remained range-bound, likely because traders were bracing themselves for the FOMC statement.
However, word got around that U.S. Trade Ambassador Dennis Shea and Chinese WTO Ambassador Zhang Xiangchen engaged in another verbal skirmish at the WTO meeting, so the Aussie began to feel some bearish pressure ahead of the FOMC statement.
And when the Fed finally announced a rate hike and released its updated forecasts during Wednesday’s U.S. session, the Aussie got slapped broadly lower as interest rate differentials came into play since the Fed’s projected path for the Fed Funds Rate shows that the Fed expects two more hikes in 2019, which is one hike less compared to the Fed’s September forecast, but is a hawkish move considering that the Fed downgraded its growth and inflation forecasts. Also, the market was expecting only one rate hike next year (or not rate hike at all).
And since the Fed signaled that it would continue to hike next year, appetite for risk evaporated because of concerns that credit conditions will tighten and slow down growth.
Anyhow, follow-through selling was only limited since Australia’s jobs report was looming and gold prices began turning higher.
And when Australia’s jobs report was finally released during Thursday’s Asian session, the Aussie initially had a positive reaction since jobs growth was stronger-than-expected.
However, the details of the report showed that jobs growth was driven exclusively by part-time employment since full-time employment fell.
And since risk aversion continued to plague the Asian markets, the Aussie was forced to turn broadly lower.
Risk aversion was still the name of the game during Thursday’s London session, but the Aussie was able to claw its way back up, apparently because of the Greenback’s broad-based slump at the time, as well as Chinese Commerce Ministry spokesman Gao Feng’s optimistic message that trade talks are progressing well and that:
“The two sides will arrange consultations including meetings and calls at any time as needed to promote the implementation of the consensus of the heads of state.”
The Greenback regained its mojo and risk aversion stuck around during Thursday’s U.S. session, however, so the Aussie’s recovery was cut short.
Also, optimism for a resolution to the trade war between the U.S. and China also began to waver when word got around that the U.S. Department of Justice was planning to indict two Chinese hackers who are allegedly linked to the Chinese government.
And it later turned out, those rumors were true.
Two Chinese Hackers Associated With the Ministry of State Security Charged with Global Computer Intrusion Campaigns Targeting Intellectual Property and Confidential Business Information https://t.co/bRQPQE02Dx pic.twitter.com/jz7Dzy6ExR
— Justice Department (@TheJusticeDept) December 20, 2018
Instead of falling further, however, the Aussie’s slide actually stalled, likely because of profit-taking. Basically, a “sell the rumor, buy the news” scenario played out.
Anyhow, the Aussie began trading sideways after that. All AUD pairs are trading below last week’s closing prices, though, so the Aussie is currently a loser for the week.