AUD June currency update
It’s been a busy couple of months, particularly with the value of the AUD falling to levels not seen since 2016, which for some industries is not necessarily a bad thing and could in fact provide a much needed boost to the economy. Despite the June RBA cut, the AUD has struggled to gather any real momentum.
Up until May this year global markets were doing well, even rallying to new highs in the case of US and Australian equities. It was surprising to see the concept of “Goldilocks” being used again in the financial media after last October’s correction. The term defines a situation in which an economy is just warm enough to prevent a recession, and not hot enough to generate inflation. Some will describe it as a “sweet spot”, linked to low volatility and central banks in developed economies being “on hold”. All in all, it was a good start to the year considering the different themes brewing in the background: trade wars, slowing global growth, deflation, geopolitical risks.
Global markets at a glance
Global markets took a toll a couple of weeks ago after the US lifted tariffs on Chinese goods and China retaliated with their own. Oil, commodity currencies and global yields fell, the USD gained more ground and volatility spiked. UK political drama managed to further escalate, and the US is now playing hardball with its biggest counter parties, including EU, Canada and Mexico.
Australian market at a glance
Locally, Scott Morrison was able to lead his conservative government to an upset election victory, reducing the risk of a potential challenge to the current “market friendly” measures. The ASX Index spiked, again, to an 11-year high, even the AUD had a short-term spike, but recent comments from the RBA are not so euphoric and on Tuesday they decided to cut its cash rate by 0.25%, marking the first official cash rate move in almost 3 years, and a fresh record low rate. The cut in rates follows a month of weak economic data, most notably an unexpected rise in the unemployment rate for April to 5.2%. The RBA placed a strong emphasis on the fact that any future cuts will be dependent on the performance of the labour market.
Key Industry Update
So far this year, the mining industry has been enjoying a nice rebound, influenced by the spike in Iron ore prices (due to supply constraints) and a lower AUD, but the attention in the next couple of weeks and months will be the US/China trade war and how it might impact demand. Mining has been a pillar driving domestic corporate profit growth through the last 24 months, distorting the broader health of the economy. With elevated metal and raw material prices largely driven by supply constraints there is a risk that the festering trade war could force a correction in recent strength.
Unfortunately for local farmers, the agricultural industry has been struggling. Australia’s wheat exports collapsed to a 50 year low as Indonesia and other major buyers look to cheaper sources in the Black sea. Globally, soft commodities including coffee, soybeans and corn are starting to recover from yearly lows, but headwinds lie ahead. While this recent cut was largely priced in, further domestic softness could force the RBA to cut rates again before the year is out. This might drive the AUD through recent supports and help reduce the cost of AUD exports easing the burden of the drought on Australian Farmers.
The manufacturing, wholesale and retail industry should be positively impacted through more consumer demand following an RBA rate cut but so far, they have been putting downward pressure on Australia’s Industry Group (AiG) performance of Services Index, which showed its worst monthly reading since October 2014 at the start of the year. The real test though is if the move will be enough to stimulate a change in consumer spending patterns. With Household debt to income ratios nearing 200% it is unlikely we will see a significant shift in consumer demand. The drag on manufacturing should continue into the second half of 2019.
What's on the horizon
Looking ahead, it’s still to be seen what the impact of a dovish RBA has on businesses and how the Government approaches demands for tax cuts and infrastructure spending. Globally, there are going to be different narratives keeping investors on their toes, deadlines have been postponed, growth forecasts have been slashed around the globe, the two biggest economies are not finding a common ground yet and the clock is ticking. Back in September markets were pricing rate hikes from the FED on 2019 and 2020 and they are now pricing rate cuts for both years, the reality is that the horizon is not clear, tensions are increasing, as well as volatility and companies across the Globe are focusing on protecting their finances and controlling their risks.