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FUNDAMENTAL ANALYSIS

AUD/USD: Irrational Numbers

AUD, USD, Irrational Numbers, Fundamental Analysis, fx trader, forex

15 Jun 2016

On 3 May, the Reserve Bank of Australia decided a further reduction of the benchmark ‘Cash Rate’ by 25 basis points to 1.75% was needed. The decision was based on1...inflationary pressures... ... lower than expected...” Secondly, the RBA noted that the global economy was growing “...at a slightly lower pace than earlier expected, with forecasts having been revised down a little further...”  Most notably and currently most importantly, “...China's growth rate moderated further in the first part of the year, though recent actions by Chinese policymakers are supporting the near-term outlook...”  Lastly a reiteration noted in many previous statements: “...Australia's terms of trade remain much lower than they had been in recent years...”

Hence, three unexpected poor data points and one repetitive theme put the RBA into a position where some type of action needed to be taken. The fortunately having been ‘frugal’ with cash rate reductions, the RBA had the leverage to act. The question is, however, do actions designed to stimulate the domestic economy have any effect on external demand?  The bulk of Australia’s trade is in the Asia-Pacific. Further, the bulk of those exports are industrial commodities. Over 70% of exports are destined for China, Japan, South Korea, India, Hong Kong and others and all with economies which are struggling to revive stagnant growth.

On the other hand, only 4.1% of Aussie exports are with the United States and most of those exports are agricultural in nature. Conversely, 11% of Aussie imports originate from the US and include a wide variety of manufactured products, from electronics to motor vehicles to aircraft. This is important to observe, since the Fed had specifically noted a slowdown in manufacturing due to a too strong US Dollar2: “.....” This is important to keep in mind, particularly after the unexpected decline in job creation in May and a sharp downward revision in the April report3. It’s also important to note that the US Bureau of Labor and Statistics has been documenting loses in the US mining industry for about a year due to low commodity prices. Lastly, the report was particularly surprising since new graduates enter the job market mostly in May and June, usually pushing job creation number up a bit.

The point is this. The RBA has needed to weaken the Aussie whereas the Fed will almost certainly not increase its benchmark Fed Funds rate at the upcoming June meeting. The Fed simply cannot risk causing any dampening of the manufacturing sector when job creation seems to have suddenly stopped cold.

AUD, USD, Irrational Numbers, Fundamental Analysis, fx trader, forex AUD USD Price Event Chart
AUD/USD Price Event Chart

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