(3 September 2018 – Australia) The Australian dollar depreciated sharply in offshore trading last week, trading at its lowest level since 2016.
The Aussie dollar fell by almost five percent in August alone and has now retreated almost eight percent against the USD through 2018. The AUD/USD reached a low of 71.8 and concluded the week at 71.9 US cents, matching January 2016 lows when global commodity prices were depressed, in particular iron ore. The currency dollar fell more than 1.6 US cents last week, representing a two percent slide in only five days as the US dollar strengthened on a renewal of President Donald Trump’s NAFTA trade tensions.
Import dependent corporates, predominantly small businesses, will be pressured to increase product pricing to absorb rising costs If the slide in the currency continues. The interest rate differential between the RBA and Federal Reserve will broaden as the RBA continues to keep rates steady at its monthly meeting for September yet the US Federal Reserve will hike rates at its two day meeting at the end of September, compounding AUD losses. Also negatively impacting AUD sentiment is the prospect of the Trump administration escalating its trade war with China as early as next week. East & Partners currency forecast research, based on direct interviews with 2,363 importers and exporters, indicates Australian corporates predict the AUD/USD to conclude the year considerably weaker at 68.2 cents. Significant variance exists by business size however, with small businesses notably more bearish than larger enterprises.
“We continue to see the A$ trending down to around $US0.70 as the gap between the RBA’s cash rate and the US Fed Funds rate pushes further into negative territory as the US economy booms relative to Australia” stated AMP Chief Economist Dr Shane Oliver. “The headline result is expected to reveal another quarter of reasonable growth and the broad consensus is that activity will continue to improve over the next few quarters. Beyond the headline figure, what will be worth watching out for is any sign that the quality of growth is changing – particularly if consumption slows. If there are material signs of softness – the RBA will, of course, take note of these increased downside risks to their outlook” commented NAB economist Kaixin Owyong.
The Kiwi Dollar was heavily sold off last week in response to business confidence collapsing to the lowest level in over a decade. The NBNZ Business Outlook Index has fallen sharply since the New Zealand election in September 2017. The NZNZ Business Outlook Index slumped to -50.3 percent, below the -44.9 percent reading seen in July. It had been as high as +24.8 percent in June last year, prior to the New Zealand election. JP Morgan Economists have predicted the RBNZ could cut official interest rates again in the short term at a time when the RBNZ reported in its August monetary policy statement that the direction of its next rate move could be ‘up or down’. Concerns about a NAFTA deal with Canada are building as President Trump commented that any trade deal with Canada would be “totally on our terms”. Elsewhere, the pound slipped as UK PM Theresa May ruled out a second Brexit vote, stating that another referendum would be a “gross betrayal of our democracy.’’ Sterling volatility is picking up rapidly at a time when FX Week reports that currency losses at their highest since the first quarter of 2017 according to a report from risk management solutions provider FiREapps. Currency losses at corporates rose to their highest level in two years, with businesses in Europe reporting the largest increase in Q1 2018. European corporates suffered the greatest losses from currency market fluctuations, nearly tripling quarter-on-quarter to US$22.89 billion. “The interesting part is that there isn’t one event you can point towards” FiREapp CEO Wolfgang Koester stated.