AUD: Tough environment - Westpac

Trade tensions are weighing on both equities and commodities and this should be a tough environment for AUD though at least USD weakness after the FOMC meeting helps limit its downside, suggests Sean Callow, Research Analyst at Westpac.

Key Quotes

“In the week ahead, if these themes remain intact, AUD/USD should trade mostly within a range of 0.7650 – 0.7750, though with obvious downside risks towards 0.7600.”

“The Fed delivered the expected rate hike last week and projected 5 more hikes by the end of 2019. This was the event markets had been waiting for. But President Trump quickly resumed the spotlight as he announced tariffs on Chinese imports. This should not be a positive environment for the Australian dollar so its resilience is notable.”

“This US dollar weakness turned out to be the major source of support for the Australian dollar in what was a difficult week for the Aussie as it slipped under 76 cents to 3 month lows.”

“Domestic data was actually supportive for the Aussie, with Australian employment rising for a record 17th consecutive month. Total employment rose by about 18,000, keeping annual jobs growth at a remarkable 3.5% over the year. We wonder how much longer Australia can create jobs at such a historically rapid pace, given that the economy doesn’t seem to have really picked up. But for now, we take it as good news that is helping support the Aussie dollar which might otherwise be coming under considerable pressure.”

“This includes commodity prices, with iron ore down from nearly $80 per tonne at the start of this month to only about $64 on Friday. Some of this pressure seems likely to be driven by concern over a potential trade war started by the US.”

“It seems that trade tensions will remain a key topic in the week ahead, especially for the Aussie, where the local calendar is extremely quiet – no major data or RBA speeches.”

“This is not a great environment for AUD though at least the US dollar weakness after the FOMC meeting helps limit its downside against the greenback. In the week ahead, if these themes remain intact, AUD/USD should trade mostly within a range of 0.7650 – 0.7750, though with obvious downside risks towards 0.7600.”