he Australian dollar is unimpressed by Chinese Q4 GDP as retail sales lag slightly behind. But if you dig a little deeper, you’ll find that the slowing in China isn’t the only thing affecting global growth. The slowdown in China and slower overall global economic activity are pressuring many of the major economies around the world including Australia. In fact, there are growing signs that we may see some kind of correction in the U.S. and U.K. – or at least a slowdown in the rate of inflation.
The U.S. has been hit hard by the recent slowing in China, but the U.S. retail sales have actually been fairly strong. And while there’s definitely been some nervousness about the direction of the U.S. economy, a stronger U.S. dollar should help its exporters to cope with the slowdown in the Chinese retail market. The Australian dollar hasn’t taken this far to worry over the direction of its economy. However, the Aussie remains very sensitive to any sign that the U.S. economy will disappoint.
While the Australian dollar is still very weak versus the U.S. dollar, it is starting to pick up versus other major currencies. The Aussie remains less than enthusiastic about the prospects for a U.S. recession, which means that traders are waiting to see whether the U.S. Consumer Price Index (CPI) rises or falls versus other major currencies. If the U.S. sees an improvement in the U.S. gross domestic product (GDP), it should move in the direction of the Aussie dollar. Should retail prices start to fall in the U.S., the Aussie dollar would likely trade lower to provide support to its lower cost base. The current weakness of the Aussie dollar is creating opportunity for investors to purchase further Australian dollar denominated assets.
The Australian dollar is likely to remain in a range between a break and no break. Should the U.S. retail sales growth report be released on the weekend, expect the Aussie to trade towards the green base rather than towards the red. Speculators have been dumping Aussies on the commodity market because they believe the commodities will continue to grow in price. Speculation is rife that the commodities markets will contract in response to the weaker U.S. dollar. If this occurs, it would be a positive for the Australian dollar.
If the U.S. Consumer Price Index increases, the Australian dollar should appreciate. On the other hand, if it decreases from its recent peak, the Aussie should depreciate. China’s economy has slowed significantly in the past three years and the U.S. Federal Reserve is keeping interest rates high to help support its expansive credit program. Consequently, there are signs that the Fed may hike interest rates higher and the Aussies will suffer with higher inflation in the face of these increased rates. This means the Australian dollar may trade against the U.S. dollar if consumer price index increases are sustained for a period of time.
In order to determine if the Australian dollar will trade against the U.S. dollar, it is important to examine the current trends in the commodity market. One indicator that may help investors determine if the Australian dollar will depreciate or if it will appreciate against the U.S. dollar is the level of global crude oil inventories. As shown in the last two months, crude oil inventories have decreased in the United States while they have increased in Australia. Should oil prices continue to decline in the U.S., it is highly unlikely that Australia will benefit as the U.S. consumer price index rises. However, if oil prices continue to rise in Australia, it is highly unlikely that the Australian dollar will appreciate against the U.S. dollar. This is due to the relatively low correlation between Australian crude oil prices and U.S. crude oil prices.
There is also a risk that the Australian economy will contract due to the U.K.’s vote to leave the European Union. If this happens, the Australian dollar may lose significant strength against the U.S. dollar due to European demand for Australian dollars. On the other hand, if the U.K. economy does recover quickly and Australia remains an economic powerhouse, the Australian dollar could appreciate against the U.S. dollar in response to stronger European economies. In this scenario, the Australian economy would likely contract if consumer price index rises are slow or non-existent in the U.K. However, should the consumer price index rises accelerate rapidly in the U.K., the Australian dollar will appreciate against the U.S. dollar. The above scenarios are possible but not likely.
Overall, the above scenarios highlight how sensitive Australian dollars are to changes in global sentiment. While the Australian dollar has had very low volatility in the past, recent events have shown how easily sentiment can move in either direction. Consumers in China and the U.K. have become more bullish on the Aussie dollar due to stronger consumer spending in these countries, while saver borrowers in Australia co