- AUD weaker against European FX
- But holds gains against USD
- Suggesting "sell America" theme intact
- Aussie wages not strong enough to prevent RBA rate cut
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The Australian Dollar has pulled back from recent highs.
A sense that the flow of good news on progress in China-U.S. trade relations is 'maxing out' is weighing on the Australian Dollar.
"Trade/economic optimism looks well priced," says Noah Buffam, a strategist at CIBC Capital Markets, as the Dollar rebound fades and stock markets start showing signs of exhaustion.
In line with this, the Australian Dollar is down 0.20% on the day against the Pound and 0.33% against the Euro. However, it holds a slight advantage against a broadly weaker U.S. Dollar.
The rise in AUD/USD that comes alongside falls in GBP/AUD and EUR/AUD is a signal that the market is showing concerns about trade again. (A weaker USD and falling stocks indicate the 'sell America' theme is not yet dead).
"The trade agreements have not been nailed down in all cases to reduce or largely eliminate ‘Liberation Day tariffs’, and so a high degree of uncertainty prevails, limiting the recovery in commodities prices, and so in commodities currencies," says Annabel Bishop, an economist at Investec.
The Australian Dollar is part of the commodity currency group, owing to Australia's strong export book with China. Fears of a Chinese slowdown owing to the trade war, therefore, naturally weigh on AUD.
"There is no certainty around US trade policy, which could see a further, marked restrictiveness once again should the US administration decide, for whatever reason, they are necessary, creating further volatility, fuelling uncertainty," explains Bishop.
Above: GBP/AUD at daily intervals, showing strong support is building.
The Australian Dollar started to recover through the latter half of April and into May as investors welcomed signs that U.S. President Donald Trump was walking away from a maximalist position on tariffs.
Gains for the Aussie accelerated on Monday when a trade accord between China and the U.S. was announced. Yet, even after the accord, tariffs will remain higher than they were pre-Trump, which points to risks for the U.S. and Chinese economies in the coming months.
Domestically, the Aussie Dollar largely ignored Wednesday's stronger than expected increase in Australian wages.
Wages rose 0.9%/qtr (3.4%/yr), which was in line with the RBA’s forecasts.
"The data continues to suggest the RBA will cut the cash rate by 25bp. In our view, the decision will be between on‑hold and a 25bp cut, rather than consideration of a 50bp cut as some analysts expect," says a note from Commonwealth Bank of Australia.
Should the RBA keep rates unchanged, the AUD would likely rally temporarily, while a shock 50bp cut would trigger weakness.
A 25bp move would leave the currency free to trade according to global developments.