Aussie dollar recovery stalls

This week the RBA held its cash rate steady at 0.75% and made clear that it expects to hold again in December. It was able to send such a message without much fear of a surge in the Aussie dollar, given that markets are pricing only a 10% chance of another Fed cut this year.

While the Aussie did rise a little after the RBA statement on Tuesday, it is flat over the week and in trade-weighted terms, remains as Governor Lowe put it, at the lower end of its range over recent times. The benefits of a weak currency are evident in Australia’s trade position, with this week’s September report showing a strong $7 billion surplus.

This brings the 2019 average monthly surplus to A$6bn. This is a remarkable improvement from $1.9bn in 2018 and just $0.8bn per month in 2017, despite the US-China trade war that began early 2018. It is by no means simply due to iron ore supply interruptions. Tourism revenues for example are up 9% over the past year.

But the RBA is not complacent about the Australian dollar remaining weak. In retaining the pledge that it is quote “prepared to ease monetary policy further if needed,” the RBA Board surely had the currency uppermost in mind. This pledge also raises questions about the durability of the recent unwinding of rate cut pricing.

Markets price just a 12% chance of a December rate cut and only a 60% chance of a move at any time in 2020. Westpac however continues to expect a cash rate cut to 0.5% in February, at which point unconventional policy options should be a hot topic again.

Our view that the RBA is being too optimistic about Australia’s economy was reinforced this week when we saw a dismal reading on retail sales volumes, which contracted in annual terms for the first time since the early 1990s. The RBA can only hope the retail sales survey is not replicated in the broader household consumption measure in the GDP report next month.

Moreover, the upbeat RBA narrative could be challenged by key data in the week ahead. We will see updates on Australian business and consumer confidence, then what is likely to be another soft reading on wages in Q3. Then on Thursday it’s the vital labour force survey. After the downtick in the unemployment rate to 5.2% in September, there is a real chance that unemployment returns to 5.3% in October.

This could rattle the Aussie which has failed to capitalize on record highs in US equities and further positive headlines on US-China trade talks, despite a likely delay in the actual agreement until December. A stronger US dollar has also helped cap Aussie rallies to just short of 0.6950, with US yields rising in the wake of solid reports on the US job market and service sector.

So it looks like a challenging data calendar ahead for the Australian dollar.