Australian Dollar News: Turnbull v Abbott a Sideshow to the Iron Ore Price Recovery
Predictions for the pound sterling v Australian dollar exchange rate (GBPAUD) suggest further weakness may lie ahead but improvements in iron ore prices bode well longer term.
The Aus dollar saw a strong rally off the news that Malcolm Turnbull will replace Tony Abbott at the helm of the country. However, this type of boost usually tends to be temporary and subsequent price action on the currency markets confirms this.
The Reserve Bank of Australia (RBA) minutes today meanwhile enlivened the prospects for further rate cuts which could undermine the currency.
Those looking for a stronger GBP-AUD over coming days and weeks will have to be patient and accept potentially lower values as markets question whether there is much downside left in the currency.
Resistance in the exchange rate is at 2.20 - this level appears to have established itself as the maximum over recent timeframes above which there is simply limited buying power.
Declines towards 21.40 cannot be ruled out at this stage, but we do believe that buying interest should prompt a recovery in GBPAUD from such low valuations:
SEB, the Scandinavian bank, has suggested that a recovery in iron ore prices may be one significant factor behind a strengthening Aussie dollar.
Australia is a major exporter of iron ore and the price of this key export is therefore important to the fiscus and the currency.
Iron ore prices have recovered around 7.53% over the course of August and September is looking bullish.
“The latest leg lower in AUD/USD has not been justified by falling ore prices, on the contrary the divergence has been one of the signs calling for a rebound in AUD/USD (other are a completed 5-wave pattern down from the May top, bullish divergences, etc.),” say SEB in a currency forecast note to clients.
Recent price action in the Aus dollar “also suggests that the market now is starting to take in the accelerating commodity correction hence higher levels should be pencilled in going forward,” suggest SEB.
A more profound correction could easily lift the AUD to the 0.74-area, the prior wave four. Iron ore yesterday also bullishly broke higher note SEB.
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RBA Could Cut Rates Again
One notable element that could undermine the Australian dollar is the prospect of a further interest rate cut at the Reserve Bank of Australia.
The RBA minutes showed decision-makers are paying close attention to moves in China:
“Members noted that it was not clear which assets the Chinese authorities had sold as part of the recent intervention, nor which assets were being bought by those taking capital out of China, but given the potential size of these flows, their effects on asset markets could be large.”
The board also noted that growth in major trading partners has slowed in Q2 due to weaker conditions in Japan and other East Asian economies, ie. China and Korea. And that several of China’s recent policy measures designed to support activity in China had not yet had their full effect.
They stated that international economic developments had increased the downside risks to the outlook.
"Given that growth remains soft, and the data very patchy, we continue to expect the cash rate to remain on hold, although recent developments suggest that the risks have further tilted towards lower rates," say ANZ Research.
The Australian dollar has been the currency to beat over recent days - but are could now witnessing a case of 'too far too fast' and would expect limits to the strength to be reached.
Fed is Key Risk Ahead
From Australia the focus now shifts to the United States where the central bank takes an incredibly important decision on interest rates.
Will the Fed raise rates for the first time in years and in doing so continue to suck global currency back towards the US?
Economic data has been more than supportive to such a move of late, but some measures of inflation expectations are now flirting with their lowest levels since the financial crisis and expected financial market volatility is now unusually high.
Neither of these are conditions that have historically supported a rising policy rate.
“We still believe the Fed is likely to raise rates before the end of the year. While the Fed is now shying away from explicit forward guidance about the timing of future policy decisions, it should at least leave the door clearly open to tightening later in the year, thus constituting a “hawkish pause” rather than a “dovish pause,” says a note on the matter from RBC Capital Markets.
