Capital Properties FX
Capital Properties FX

3 Fundamental Forex Signals for AUDUSD


“Time will run back and fetch the age of gold” – John Milton – ON THE MORNING OF CHRIST’S NATIVITY

Aussie has been well bid for five consecutive weeks now. At the end of last year, the Australian dollar dropped almost to 71 cents against the dollar. Since then, it managed to recover. As the Reserve Bank of Australia is having a meeting next week, we should look for fundamental forex signals to forecast the outcome of the coming event.

When the financial crisis started back in 2008, RBA was perhaps the most conservative central bank among the developed nations. By 2009 the FED had lowered Federal Funds Rate to 0.25 percent and the ECB to 1.0 percent. Meanwhile, RBA maintained its Cash Rate at 3 percent and soon after, brought it back to 4.75 percent.

Today, the RBA’s official Cash Rate stands at 1.5 percent. The official forecast is that they’ll keep the rates unchanged. Given the fact that Aussie has been well bid against the dollar, I’d say the forex signals that “no change in policy” is the likeliest outcome. However, there are some signs that not everything is perfect in Australia’s economy.

Cash Rate

Inflation is an Issue when Trading Forex

In the 4th quarter of 2016, Australia’s inflation, year over year, stood at 1.5 percent. It’s the highest reading since the 1st quarter of 2016 y/y. Although 1.5 seems like a good figure, the problem is that the CPI in Australia has been moving lower since the beginning of the financial crisis. In 2008 RBA’s Cash Rate was at 7 percent and the CPI was close to 5.

Right now, I’d consider issues with inflation as one of the fundamental forex signals, that RBA might actually do something to avoid any further deterioration there. Even though it’s questionable if they are willing to act during the next meeting but it’s something that is worth keeping in mind.

On the other hand, RBA needs to keep the rates higher because of the potential housing bubble. It’s no secret that in certain areas in Australia, real estate prices are making higher highs. Accommodative monetary policy by the Reserve Bank of Australia is also adding fuel to the issue. Any further cuts in the Cash Rate would only make things worse.

U.S. Withdrawal from the TPP

After Trump signed the executive order to withdraw the U.S. from TPP, the idea of the trade deal became questionable. But Australia has decided to move forward and has asked China and Indonesia to join the Trans-Pacific Partnership. However, if both of them should decline, then the fate of the TPP is pretty much sealed.

Regardless of how the deal plays out, U.S. withdrawal from the agreement is a big loss. And since it is a significant change in the bigger picture, it makes the next week’s RBA’s statement even more appealing. We do not know if the RBA sees it as a negative event for Australia’s economy or not. Chances are that the deal will be mentioned in their statement.
On the other hand, the changes in the TPP can definitely be as one of the fundamental forex signals that changes in the RBA’s monetary policy may not be very far away.

Donald Trump and Australia

On Thursday morning the whole world was rather surprised to hear about the content of the phone call between President Trump and Australian Prime Minister Turnbull. Both countries have been close allies for decades and hence it was surprising to hear that their phone call didn’t go well at all.

According to major media outlets, the call that was supposed to last for one hour ended abruptly after 25 minutes. Allegedly, Trump was extremely critical towards the asylum seekers swap deal signed by President Obama. Last year the United States agreed to resettle up to 1250 illegal immigrants from Australia. In return, Australia would resettle refugees from El Salvador, Guatemala, and Honduras.

But it seems that President Trump has a totally different view on the matter, compared to the previous U.S. administration. Right now it’s not clear if the U.S. is going to honor the contract or not but nevertheless, the damage has already been done.

I think it’s worth mentioning that when it comes to U.S. weapons sales, Australia is one of the biggest clients U.S. has. Furthermore, Australia is among the ten countries that have signed up to buy the new, ultra-expensive Lockheed Martin F35 fighter jets. Also, both countries are part of the Five Eyes group that share intelligence network.

Any fall out between the States and Australia could have long-lasting effects on both economies. While it is unlikely that one phone call would ruin decades of good relations, it’s worth keeping an eye on further developments regarding the swap deal.

Conclusion

In general, the Australian economy is doing fine. Both services and manufacturing PMI’s are currently above the 50 level and the unemployment rate stands at 5.7 percent. Then again, inflation is drifting lower at a steady pace and the housing market is slightly overheated. Is this enough for RBA to act?

Recommended further readings:

Foreign Exchange Training Manual“. Confidential Treatment Requested By Lehman Brothers Holdings, Inc.
Essentials of foreign exchange trading“. Chen, J., 2009. (Vol. 44). John Wiley & Sons.