- The Australian dollar was hosed on Wednesday as the RBA adopted a neutral bias on the outlook for Australia’s cash rate.
- In late trade, the AUD/USD is on track to record its largest one-day percentage fall in over two years.
- A sharp plunge in German factory orders weighed upon the euro, ensuring the greenback was one of the standout performers during the session.
- US Federal Reserve Chair Jerome Powell will speak later today. New Zealand unemployment data will also be released.
The Reserve Bank of Australia (RBA) delivered a sledgehammer to the Australian dollar on Wednesday, leaving it on track to log its largest percentage decline in over two years.
The damage can be seen in the scoreboard below as at 8am in Sydney.
AUD/USD 0.7115 , -0.0119 , -1.65%
AUD/JPY 78.22 , -1.33 , -1.67%
AUD/CNH 4.8213 , -0.07 , -1.43%
AUD/EUR 0.6258 , -0.0078 , -1.23%
AUD/GBP 0.5500 , -0.0088 , -1.57%
AUD/NZD 1.0416 , -0.0074 , -0.71%
AUD/CAD 0.9398 , -0.0097 , -1.02%
Clearly, the Aussie has been hosed across the board, especially against the greenback with the AUD/USD falling to the lowest level since January 25.
At .1.65%, the AUD/USD is currently on track to record its largest one-day percentage decline since November 2016.
The sudden downdraft in the previously high-flying Aussie came courtesy of RBA Governor Philip Lowe who says the bank no longer believes the next move in the cash rate is likely to be higher, describing the risk of the next movement now as being evenly balanced.
“Over the past year, the next-move-is-up scenarios were more likely than the next-move-is-down scenarios. Today, the probabilities appear to be more evenly balanced,” Lowe said in a speech to the Australian Press Club in Sydney.
“In the event of a sustained increased in the unemployment rate and a lack of further progress towards the inflation objective, lower interest rates might be appropriate at some point.
“We have the flexibility to do this if needed.”
Notably, the RBA downgraded its entire inflation forecast profile, only seeing underlying inflation rising to 2.2% by the middle of 2021, a smaller and slower increase than was previously expected.
That reflects an expectation that Australian GDP growth is unlikely to be as strong as the bank previously thought.
After seeing the prospect of a 25 basis point rate cut by the end of this year as a coin toss prior to Lowe’s speech, financial markets have quickly priced in a full 25 basis point cut by February next year with a small risk that it may be two. An increasing number of economists also share this view.
The change in RBA mindset weighed significantly on the Aussie, seeing it continue to lose ground in Asian and European trade. The RBA shift also weighed on other commodity currencies such as the Canadian and New Zealand dollars, despite strength in most commodity markets.
Another terrible data reading from Germany, this time a sharp 1.6% decline in factory orders in December which intensified concerns about the health of the broader global economy, saw the euro also come under pressure, seeing the US dollar lift strongly against most major crosses.
The buck was also helped by news that the US trade balance narrowed sharply in November, an outcome that will likely help to boost Q4 GDP growth.
Turning to the day ahead, the Aussie’s performance will likely be determined by sentiment, headlines and technicals given a lack of first-tier economic events.
The Ai Group will release its Australian Performance of Construction Index (PCI) for January at 8.30am AEDT. It’s been fairly terrible recently, and few expect that will change in early 2019 given the recent signals from other housing indicators.
The NAB will also release its Q4 Business Confidence Survey, a report that may garner more attention that usual given the steep plunge in business conditions reported in December. It will arrive at 11.30am AEDT.
Regionally, New Zealand Q4 unemployment data is the headline act. On the policy front, US Federal Reserve Chair Jerome Powell will also speak from 11am AEDT.
Later in the session, markets will be casting a keen eye on German industrial production in December given recent weakness in factory orders. US jobless claims and consumer credit data will also be released.
In central bank action, the Bank of England is expected to keep monetary policy settings unchanged following its February monetary policy meeting. The ECB will also release its latest Economic Bulletin while the European Commission will provide updated forecasts on European economic growth.
Brexit negotiations may also deliver some volatility for the British pound as Theresa May meets with European Commission President Jean-Claude Juncker.
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