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Australian Dollar May Extend Drop as Yen Gains on OECD Outlook

Australian Dollar May Extend Drop as Yen Gains on OECD Outlook

Ilya Spivak, Head Strategist, APAC

AUD, NZD, RBA, LOWE, RBNZ, US-CHINA TRADE WAR, OECD, USD – TALKING POINTS:

The Australian Dollar underperformed in Asia Pacific trade after minutes from May’s RBA policy meeting signaled that the central bank may be ready for a rate cut as soon as next month. A subsequent speech from the central bank’s Governor Philip Lowe seemed to make the case for easing even more explicit. He went so far as to confirm that policymakers have an “easing bias”.

The New Zealand Dollar followed its Aussie cousin downward. That might have reflected investors extrapolating the two economies’ broadly analogous profiles to mean that the RBA’s defensive stance might portend RBNZ rate cuts too. Both countries are cycle-sensitive commodity exporters on the front lines of a slowdown in global growth and an escalating US-China trade war.

AUD, NZD MAY EXTEND DROP AS YEN GAINS ON OECD OUTLOOK

Looking ahead, commodity bloc currencies might face further pressure as the OECD issues an updated set of economic forecasts. A raft of downgrades seems likely. Timely PMI survey data puts the pace of worldwide manufacturing- and service-sector growth near a three-year low. Meanwhile, a measure of overall macro data flow reveals it has tended to undershoot baseline forecasts by meaningful margin.

A downbeat revision might weigh on market-wide risk appetite, inspiring another round of systemic de-risking. The Yen is likely to gain in this scenario as carry trades funded in terms of the perennially low-yielding Japanese unit are unwound. Meanwhile, the US Dollar might rise as liquidation puts a premium on the benchmark currency’s unmatched liquidity.

Did we get it right with our latest FX market forecasts? Get them free to find out!

CHART OF THE DAY – US DOLLAR GAINS REFLECT HAVEN DEMAND

Australian Dollar May Extend Drop as Yen Gains on OECD Outlook

Currencies are typically expected to fall when their central banks are seen pivoting to a more dovish policy stance. The US Dollar has marked a clear exception to the rule. It has jumped to a seven-year high against an average of its major counterparts even as the priced-in policy outlook implied in Fed Funds futures flounders alongside benchmark 10-year Treasury bond yields.

The bellwether S&P 500 fell in tandem, implying a backdrop of risk aversion. In this scenario, it is not unusual to see lending rates decline as haven flows lift Treasuries while tightening prospects – such as they are – fizzle. That the Greenback has managed to thrive in this environment seems to clearly mark it out as a haven asset. If investors’ mood counties to sour, it may have scope to probe headier highsstill.

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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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