Record Lows for AUD, ASX, Bond Yields Amidst Disappointing Capex Data

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Record Lows for AUD, ASX, Bond Yields Amidst Disappointing Capex Data

 Record Lows for AUD, ASX, Bond Yields Amidst Disappointing Capex Data

The Australian currency is down by nearly 6% since the start of the year, hitting decade lows against USD. The ongoing tensions in the Middle East, doubts on the economic outlook of the country after the raging bushfires, impact of deadly coronavirus across industries, business and equity market, are all weighing heavily on the domestic currency.

S&P ASX 200 closed 1% down on 27 February 2020 as new year’s landmark highs and records are eroded. Today, it crashed 2.4% to 6504.6 as at 1:15 PM AEDT.

AUD plummeted to a fresh low at US65.41cents on Thursday before recovering to settle at US65.47 cents. Below is the chart depicting AUD performance since October 2019.

AUD/USD Trend

AUD/USD Trend (Chart Source: Thomson Reuters)

10-Year Bond Yields Dip

The 10-year bond yields of Australia have shown a significant fall to 0.845% after the dismal capex data in the fourth quarter. The yields have fallen from a high of 1.42% during the start of the year, amidst concerns on economic growth, coronavirus fears and bushfires impact.

In August 2019, the 10-year yields sank to a record low of 0.85% owing to fears of global recession and US-China trade war. Yields have fallen to similar lows, also exerting pressure on AUD.

Disappointing Q4 2019 Capex Data

As per the data released by ABS on capital expenditure for December quarter 2019, the total new capital expenditure fell by 2.8% in seasonally adjusted terms, pulled down by a 5.9% decrease in buildings and structures investment.

Although, market was expecting a 0.5% uptick in the capex figures.

However, a look at the seasonally adjusted estimate for equipment, plant and machinery gives a positive sign as it rose by 0.8% in the quarter.

Analysts anticipate a pick-up in the nominal capital expenditure in 2021 hinting that the friction from the private investment will wane by mid-2020.

ASX Wipes Gains

ASX 200 Index closed 0.8% lower on Thursday, wiping out all the year to date gains, closing at 6657.9 points amidst shaky global economic environment. While the falling oil prices weighed on the energy stocks, the technology sector beat a hasty retreat.

After a week-ago record close of ASX, investors are responding negatively to the risks posed by COVID-18 outbreak. The index is 2.4% down on 28 February 2020 (as at 1:15 PM AEDT), eroding six months of uptick.

Besides, US market correction is proceeding swiftly.

Unexpected Jump In Unemployment Numbers

Despite the Australian economy producing more work, unemployment jumped from 5.1% in December 2019 to 5.3% in January 2020 (seasonally adjusted basis). The underutilisation rates stood at 13.9%, which is one of the highest since April 2018 and is on a rise.

Market expectations are that employment growth will remain below 2% that will likely keep the unemployment rates at elevated levels of 5.3% or above, forcing the need for RBA for further rate cuts.

Downside risks also prevail due to weaker than expected construction work done data released by ABS.

RBA’s Anticipated Move Amidst Shaky Environment

There have been growing fears of coronavirus affecting the world’s largest economy China which are weighing heavily on businesses, investment and demand worldwide.

The market is now in a panic phase amidst the risk of the virus spreading to newer regions.

Slipping dollar, dipping stock market, dismal economic indicators and record low yields, market participants expect that the RBA will have no option but to cut the rates as the outlook of the economy remains gloomy.

ALSO READ: Coronavirus Takes a Toll on Global Markets

RBA is swamped with uncertain economic outcomes in 2020 with coronavirus outbreak and domestic bushfires turning to be unexpected shocks to the economy, including dismal PMI readings, the unemployment rate shooting up to 5.3% in January 2020, sluggish wage growth, and dip in retails sales and trade surplus. .

RBA made a mid-cycle monetary policy adjustment to fight the sluggish economy in 2019. It has reduced its interest rates to almost half, taking it from the initial 1.5% during the middle of 2019 to 0.75%.

There were three cuts of 25 basis points due to weak consumer spending, the slowdown in the economy and reduced inflation, raising real interest rates. Currently, Australia has quite negative interest rates (real terms) when the economic activity is moving between 1 to 2%.

ALSO READ: RBA's rate cut cycle - Where do we stand and what it means for consumers

RBA Expected To Cut Interest Rates In July

As per analyst expectations, RBA will keep lowering interest rates in 2020 until they reach an effective lower bound of 0.25%. This is supported by the premise that the unemployment rate is expected to be above and inflation below the RBA’s target.

However, one needs to understand that the transmission of interest rates takes about 1 to 1.5 years to realise its full impact on the economy. The initial effect is on factors like currency and the housing market ,translating to consumer and business spending. Only after the flow into these segments, effects on unemployment and inflation can be expected.

Hence, considering the time of trickling down of the effect of rate cuts, interest rates are pricing in a reduction from RBA for July.

AUD can even fall lower if coronavirus takes a longer than expected time to contain and if it results in the shutdown of the Chinese economy for a long period. This will partly leave the currency in the grip of the risk appetite globally.


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