It’s been a difficult three months for the Australian dollar, which put in its worst performance since the end of 2016 and at points touched ten-year lows against a basket of currencies. A range of factors weighed on the Aussie; a mixed economic picture on the domestic front combined with the ongoing US-China trade war and the policy changes of the Reserve Bank of Australia (RBA).
Confidence is a preference
Confidence measures were one of the factors that put pressure on the RBA to take action. In July, a Westpac survey showed that there was a drop in consumer confidence for the second consecutive month as it hit a two-year low of 96.5. Despite two rate cuts from the RBA, consumer confidence tumbled -4.1% causing the Australian dollar to lose out to sterling and the US dollar and there was little clarity in the business confidence figures. The NAB Business Survey showed that business confidence was up from 2 to 4, but in the same period business conditions had deteriorated from 4 to 2, leaving investors to wonder if the confidence was misplaced.
One of the challenges for the Australian dollar is that in isolation, many of the ecostats coming from down under are positive, particularly when compared with results across the world, and yet the Australian dollar is struggling to make headway. Recent employment figures showed an increase of 41,000 new jobs, steady unemployment at 5.2% and an uptick in the participation rate at 66.1%. GDP fell in line with forecast, expanding 0.5% in the second quarter – not a stellar number but viewed in the context of a global slowdown, a positive result. August PMIs for manufacturing also showed growth but construction fell 2.8% in the second quarter and is down 11% on the year. In addition, new home sales dropped by 7.2% in July and 12.8% year-on-year. It seems that the good news wasn’t good enough to outweigh the bad, and both confidence and the Aussie suffered. Declining consumer confidence was considered an indication of the potential for policy changes from the RBA, which proved to be the case by the end of the quarter.
RBA takes rates to record low
In July, the RBA cut interest rates to 1% and the accompanying statement suggested that not only were low rates set to stay for the foreseeable future but also that further cuts could not be ruled out. The market anticipated that further cuts may follow from the release of second quarter GDP figures and once again the market proved prophetic when Q3 was kicked off with a cut to 0.75%. The Australian dollar made gains ahead of the anticipated announcement, but fell shortly after as Governor Lowe indicated that further cuts would follow if the action was warranted.
This is the third reduction in the cash rate in five months but the tone of the accompanying statement had more impact than the change in rates. It may have been the next logical step, but the action had the Australian dollar dropped 0.4% against the US dollar and while the Australian share market was up 0.81% after the announcement, its best day in almost a month, the currency did not feel the benefits of the move. The Aussie dipped to a four-week low against the greenback and approached a decade-long low after the RBA announcement. RBA Governor Phillip Lowe acknowledged that the economy was at a turning point but stressed the domestic and global pressures on the Australian economy, including slower jobs growth and low inflation as well as the impact of the US-China trade war may mean further changes to rates and policy are warranted.
Global picture casts a cloud
Australia has been impacted by the trade war between US and China; there have been reports that the impasse may be coming to an end but the lack of any concrete developments together with numerous previous setbacks has left the markets cautious. When RBA Governor Lowe highlighted that economic risks were “tilted to the downside,” he made particular reference to the dispute which is “affecting international trade flows and investment as businesses scale back spending plans because of increased uncertainty.” Plans are in place for a meeting in October between the US and China to resolve the issues but until the results are seen, the matter continues to cast a shadow on global trade.
The trade war isn’t the only global factor impacting the Aussie; the currency had a six-week rally ahead of an expected rate cut from the US Federal Reserve. Analysts considered the impact a cut would have on both US and Australian bond yields and took the Australian dollar higher. When the cut was delivered, however, the risk-sensitive Australian dollar lost out to sterling. Moving into Q4, improvements in the global picture could assist the Australian dollar, and the RBA note that there is potential for a turning point in the economy but with so many variable and unpredictable factors, there may still be a measure of volatility that sees the Australian dollar struggle to stay ahead of the pack.
NZD Q3 Quarterly Overview
The New Zealand dollar has also had a challenging quarter; while not hitting quite the same lows as the Australian dollar the Kiwi lost an average of 6.5% against a basket of currencies.
Disappointing trade figures and an uncertain outlook
Like Australia, New Zealand is feeling the impact of the US-China trade war, particularly because China is the country’s largest trading partner. In the 12 months to August, exports fell while imports remained largely unchanged. The $1.6 billion deficit was slightly wider than analysts had predicted, bumping up the annual shortfall to $5.5 billion. Imports from China were up 11% in the 12 months to August and imports from Australia, NZ's second biggest trading partner, rose 5.2%. The changing picture within the global trade environment is presenting a challenge to the New Zealand economy and the balance of trade highlights the potential for further disruption and uncertainty if the US-China trade war doesn’t come to a positive conclusion after the October meeting.
There is an air of pessimism in New Zealand that is reflected across many parts of the world currently with so many uncertain factors at place. While consumer prices rose by 0.6% in the first quarter and were up 1.7% on the year, Q2 reports showed a slowing of growth in the Business NZ manufacturing purchasing managers’ index. As the challenging quarter drew to a close, the NZIER’s Quarterly Survey of Business Opinion showed that a net 35% of companies in New Zealand “expect a worsening in general economic conditions,” and confidence was at its weakest level since March 2009. As a result, the outlook is downbeat; NZIER research suggests that GDP growth with ease below 1% later this year and highlight the particular pressure on manufacturing due to changes and uncertainty in global trade.
Staying in step with Australia
While the two currencies aren’t linked, the New Zealand dollar often mirrors the performance of the Australian dollar. Analysts often assume that the countries have similar factors influencing their currencies because of geographic proximity. For example, when the RBA kept the cash rate unchanged over the summer, investors assumed that the Reserve Bank of New Zealand would be likely to follow the same approach.
RBNZ considers scope for fiscal and monetary stimulus
While the market expected the RBNZ to follow its Australian cousin, it took the lead in Q3, cutting the interest rate from 1.5% to 1% and the market perceived this as paving the way for the RBA to follow suit. After the cut was announced, the Kiwi fell against a basket of currencies although it held its ground against the Australian dollar. The cut was accompanied by a statement which caused some ripples in the market as RBNZ Governor Adrian Orr highlighted that "it's easily within the realms of possibility that we might have to use negative interest rates.” Later in the quarter, the RBNZ held rates and the kiwi made gains, but the statement still highlighted that there was “scope for more fiscal and monetary stimulus if necessary.” Investors inferred that despite the cautionary tone, no further cuts were imminent and the New Zealand dollar strengthened, gaining three and a half cents against sterling.
There is caution as the market considers the possibility that the RBNZ will at some point drop its avoidance of unconventional policy measures in light of the domestic and wider global economic picture. The challenge is that there is much uncertainty on the global stage and this could sway the Kiwi; for example developments in the Brexit process could aid or hinder the New Zealand dollar on sterling. The difficulty is that market remains uncertain as to which way the Brexit negotiations will go, and together with other factors such as the US-China trade war also unresolved, the New Zealand dollar may be in for a challenging time for the rest of the year. This may prompt the RBNZ to take further action which further influences the currency.