Like rats on a sinking ship, one by one we saw economist after economist jumped off the Australian hike path and onto the cut bandwagon.
The market too followed suit the interbank market is now fully pricing in a 25-basis point (bps) cut by December 2019 with a 50% chance of a further 25bps out of the official cash rate by year end.
It’s perfectly summed up in this chart from the ASX.
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Why has the market got so dovish on the cash rate so fast? ‘Growth is ending’, ‘per capita GDP is now in recession’ ‘household sending is collapsing’. The pencil-necking was large make no mistake.
I would agree that growth is slowing, and that consumption has been come a concern.
However, let’s look at the actuals from this week GDP plus a few other inputs that feed into the AUD.
First the GDP numbers:
- Quarterly GDP grew at 0.2%, missed estimates and was structurally weak in the area of private investment.
- Year-on-year (yoy) was the big miss at 2.3% vs 2.5% consensus estimate – it was actually below the lowest estimate given.
- ‘Wealth effect’ issues: collapse in big ticket items such as car sales and furnishings
- Household spending in Australia’s largest state NSW collapsed to 0.1%
- Labour compensation was up 4.3% yoy
- Corporate profits jumped 11% yoy
Yes growth is moderating and yes productivity isn’t growing which does paint a gloomy picture. However, some granular parts that suggest there is no ‘scorched earth’ scenario coming.
The question then becomes, what did the AUD do on this news?
It clearly tested some longer-term support lines.
However, since then two things have happened that bring a bit of focus into our trade thinking.
First, the Australia trade balance for January was the second-best print on record beaten only by the December 2016 print. At $4.5 billion with a 5% jump in exports it reduces the current account deficit with some estimating it could reduce the current account deficit to 1% of GDP. That will take the pressure off Australia’s reliance on foreign capital – A direct AUD lever.
Second, inflation is bottoming out, it anaemic but it is holding at 1.8% there forcing of the RBA.
This week has clearly put downward pressure on the AUD (as it should). However, the argument now is: has this week created a scenario that is structure in nature or just cyclical?
In my opinion until the RBA is ‘forced’ to cut rates this is current movement is likely to be cyclical and until the RBA make a cut actual, the AUD will not push to and hold at or below 68c. Thus it is likely to remain in its tight band of 70c-73c.