This week, investors are paying close attention to the Australian dollar. This is because of three key reasons. First, with the trade war raging on, investors are concerned that the Aussie could be affected. This is because the country relies heavily on the health of the Chinese market. A third of its exports are bought by China. Therefore, if there is a sign that the Chinese economy is softening, it could have negative impacts on the economy. Another issue is that Australia is a close ally of the United States. There are signs that China will crack down against some of the US allies, especially after the recent ban of Huawei.
Second, this will be an important week from a data perspective. Yesterday, Australia released the manufacturing PMI, which rose to 51 from the previous 50.9. This was lower than the expected 51.1. In the first quarter, the country’s companies gross operating profits declined by 1.7% from the fourth quarter’s 2.8%. Today, data showed that retail sales in April declined by -0.1% from the previous 0.3%. Investors were expecting a growth of 0.2%. The current account declined to $2.9 billion, which was worse than the expected $2.5 billion. Tomorrow, the statistics office will release the final reading of Q1 GDP. The economy is expected to have grown by 1.8% in the first quarter. On a QoQ basis, it is expected to grow by 0.5% from the previous 0.2%.
Finally, the RBA became the first big central bank to lower interest rates today. As expected, the bank lowered interest rates by 0.25% to an all-time low of 1.25%. In reaction to this rate cut, the aussie rose sharply, which is an indication that the rate cut was already priced in. Some investors expected the bank to go further and cut rates by 50 basis points. In reaction, ANZ bank became the first one to announce its lending rate. The bank slashed the rate by 0.18%.
The bank said that the rate cut will help support the employment growth and provide greater confidence that inflation might be consistent with the medium-term target. The bank also suggested that the economy will grow by 2.75% this year and in 2020. This growth will be supported by the increased investments in infrastructure and increased activity in the resources sector. The statement added that:
The recent inflation outcomes have been lower than expected and suggest subdued inflationary pressures across much of the economy. Inflation is still however anticipated to pick up and will be boosted in the June quarter by increases in petrol prices. The central scenario remains for underlying inflation to be 1¾ per cent this year, 2 per cent in 2020 and a little higher after that.
Shortly after the rate cut announcement, the AUD/USD rose to almost the 0.7000. It then pared some of those gains. There is a likelihood that the pair may resume the upward trend to test levels above the important support level of 0.7000.