Foreign exchange can be a very frustrating asset class. Despite a strong correlation between US stocks and the AUD/USD exchange rate throughout Monday, the relationship completely broke down yesterday. The high around 0.7755 came at lunchtime in Sydney and from that point onwards it was steadily lower for the pair, even as the futures market signaled another triple-digit gain for the Dow Jones Industrial Average before a late plunge into the close. The Aussie Dollar fell on every one of its crosses and was the worst performer of all the major currencies we follow here. AUD/NZD is back on a 1.05 handle whilst AUD/CAD threatened is at 98 cents for the first time in almost six weeks.
Amidst all the various impacts on the Australian Dollar, the analysts over at Bank of America Merrill Lynch reckon the outlook for industrial metals prices is the major reason to be bearish. “The deceleration in iron ore shipment growth warrants caution against buying AUD until the data distortions dissipate. Moreover, a stronger USD, firmly neutral RBA and rising trade tensions at a global level are unlikely to present a constructive backdrop for the currency.” They say, “It is clear the downtrend in iron ore shipments began well before the Lunar New Year distortions, coinciding with the broader slowdown in fixed-asset investment. The smoothed growth rate (3m% y/y) of iron ore shipments in value terms is now at its weakest since February 2016, falling 23.7% y/y. This is partly related to high inventory at Chinese ports, but at least partly symptomatic of a weaker demand trend [which] bodes poorly for Australia's exports to China.”
As for incoming economic data, the weekly consumer confidence numbers were no help to the AUD with the headline index slipping 0.9% last week following a 2.2% bounce previously. Views towards current economic conditions deteriorated sharply by 6.8% to 101.9, its lowest value in 18 weeks. Future economic conditions were also hit, falling 3.6% to 108.7, a five-week low. The team at ANZ who produce the data noted, “Last week’s back-and-forth on import tariffs between the US and China roiled global and domestic equity markets, fuelling fears of retaliatory measures by governments worldwide. This is likely responsible for the sharp deterioration in households’ views around the economic outlook. Additionally, the unexpected tick up in the unemployment and underemployment rate in February may also have impacted. Stepping away from the week-to-week volatility, views around economic conditions (four-week average) have fallen by about a third from their February peak. However, they remain above their long-term average and consistent with our expectations of solid economic growth in 2018.” The Aussie Dollar opens in Asia this morning at USD0.7685, with AUD/NZD at 1.0575 and GBP/AUD1.8415.