Against the greenback, the Aussie has shed 7.9 percent so far this year. The RBA’s recent decision to hold the cash rate at 1.5 per cent has blurred the currency’s outlook. The AUD dropped to as low as US 71.62c overnight, and as a proxy to China’s economic prospects, it is increasingly trading. Among the major currencies it was not just Aussie alone in taking a step back overnight as the Euro also retreated.
The AUD would not be out of the woods in terms of risk of returning to retest post-2014 cycle lows below US70¢ unless the pressure on emerging markets, not just from rising US rates but also the likely mounting up of US tariff actions on China and potentially higher USD/EM Asia FX is out of woods. For other industrial commodities also, the firm saw declines ahead.
Two negatives for the EM currencies are that investors are anticipating slower fed interest rate raise in the next few quarters, but the Fed will raise rates a bit more quickly and expect that China's economy will lose more momentum as quoted by Mr. Jones. As the US economy will slow down sharply, the expectations are that the Fed will stop hiking interest rates in mid-2019, which may probably bring in demand for risky assets and in such circumstances EM currencies typically fall.
Australia's trade performance, the government budget position and mining sector profits are supported by the decline in Australian dollar so far this year. The weaker Asian currencies have dragged down the AUD particularly the CNY while acting as a proxy of risk for China.
The PMI data for September manufacturing suggest that growth is slowing as the US trade policy has put intense pressure on China. The monetary and fiscal policy will be eased by Chinese policymakers to underpin the growth as predicted by market commentators, to address excesses in debt markets the scope for action is limited by government policy. Sterling on the other hand slipped to a three-week low as a conflict over Theresa May’s (UK Prime Minister) Brexit plan escalated.
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