Aussie: You Can’t Bite Off More Than You Can Chew

AUD/USD correction may continue

The Australian dollar turned out to be one of the main beneficiaries of the conflict de-escalation between the U.S. and China. Investors have seen the information that China will buy more US products and cur down the import tariffs on the U.S. cars as the best possible outcome of the meeting between Donald Trump and Xi Jinping. The lunch break is too short to settle down all the problems, but the willingness of China to make concessions makes further protectionism acts less likely, and so the risks of a slow down in global trade and GDP grow weaker. As Australia have close trade relationships with China, the progress, reached in Buenos Aires sent the AUD/USD up.

Ahead the G-20 summit, investors saw the Aussie as kind of indicator of how the market’s view on the talks between the two presidents. Previously, the Aussie was quite sensitive to Donald Trump’s comments and to the news about his phone talk with Xi Jinping. I believe that the hopes for the easing of the US-China trade tensions became the key driver of AUD/USD strengthening ןמ November.

Aussie response to trade war

Source: BloombergHowever, I wouldn’t right away suggest the bullish long-term outlook for the Australian dollar. The U.S. isn’t going to cancels the current import tariffs, worth $250 billion. And, as China substantially increases purchases of the U.S. agricultural, energy, and industrial products, will set back its foreign trade, finally driving China’s GDP rate down. According to the slow PMI progress, China’s economy continues slowing down its growth in the fourth quarter.

Only 10 out of 25 Bloomberg experts project the Reserve Bank of Australia will hike cash rate in 2019. The derivative markets signals the odds fro this to be less than 50%. First, the RBA expects a slower increase of average wages (+2.75%) than it was during the previous period of tightening its monetary policy. Second, the central bank is rather concerned by asset market bubbles, as it doesn’t let them boost too much by means of tight lending policies. Third, the drop in housing prices rate gets the population to save up, which is driving the GDP rate lower. And, finally, Phillip Lowe and his colleagues more often suggest they need to cut down the unemployment rate to 4% before they start normalizing the monetary policy.

Chances of RBA’s cash rate hike

Source: BloombergDynamics of Australia wage growth

Source: Bloomberg

So, the middle-term Aussie outlook is bullish, its long-term prospects look, on the contrary, bearish. On the short-term scope, the AUD/USD bulls need to withstand the challenges of the U.S. labour market report and the FOMC meeting. These events give an opportunity to by the pair on the rate decline with the targets at 0.75 and 0.762. In late January and in February, 2019, one may think about buying EURUSD as the excitement about improved US-China trade relations should be fading out.

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