Today’s Key Market Drivers: 22nd February 2019
Aussie Dollar Tanks.
The Aussie Dollar took another leg lower on Thursday following an announcement out of China and from Westpac Bank that could have a profound impact on the longer-term direction of the local currency. Here are the fundamental facts that conspired to send the AUD lower on Thursday afternoon.
- According to CNBC who was also quoting Reuters News Agency the People’s Bank of China (PBOC) is likely to cut market-based rates and further lower banks’ reserve ratios (RRR) to boost credit growth and reduce firms’ borrowing costs, according to the sources involved in internal policy discussions. Analysts polled by Reuters expect China’s official growth rate to cool to 6.3 percent in 2019, a 29-year low, and some believe real activity is already much weaker than government data suggest. Any talk about lower interest rates in China is just another sign that the Chinese economy is slowing and the knock-on effect for the Australian economy would be felt as China is Australia’s biggest trading partner. Source CNBC
- Reuters reports that Chinese traders are halting purchases of Australian coal and coking coal as clearing times through China’s customs have at least doubled to 40 days or more, four traders at major buyers say. The traders told Reuters on Monday only cargoes from Australia, the biggest supplier of the fuel to the world’s top consumer, were affected. “We have stopped ordering coal from Australia because it is unknown how long the restriction will last,” said a manager at a Shanghai-based trading company who usually buys around 400,000 tonnes of Australian coal every month. China is Australia’s largest trading partner and if Coal and Iron Ore exports are impacting in coming quarters this will no doubt have a negative impact on the local economy. Source CNBC
- Westpac’s Chief Economists Bill Evans says the RBA will be forced to cut its benchmark interest rate twice in 2019 thanks to falling home prices which will cause a negative wealth effect and drag down the economy. Evans lowered his expectation for growth from 2.6% to 2.2% and says the cuts will likely come in August and November. A cut in the RBA cash rate to 1% would mean a significant widening in the interest rate differential between the US and Australia and would highly likely send the AUD back closer to 0.60c or potentially even lower. Evans comments follow a study by LF Economics that said home prices in Sydney and Melbourne could fall by 15%-20% in 2019 alone in both cities.
The reality is a lower Aussie Dollar is going to be great news for the local economy as it will make Australia much more competitive at an export level, tourism numbers will spike and if interest rates at the RBA are 1% mortgage payments will be lower and with a bit of luck a recession will be avoided. The local stock market will also likely outperform.
I have said it before and I will say it again. Be extremely careful with financial leverage in the coming two years. Australia’s economy may be about to roll over and if China slows quicker than forecast then the downturn could be severe.
Official job numbers spikes the Aussie and then retracts immediately.
There was a spike on the Aussie Dollar at 11.00am AEDT on Thursday following better than expected jobs numbers for the month of January with 31,000 jobs being created vs the 15,000 expected. The official unemployment rate stayed steady at 5% and the spike higher on the AUD quickly evaporated as investment banks and hedge funds had no interest in continuing to drive it higher. Some economists expect the official unemployment rate for Australia to tick back up towards 6% over the coming 12 months.
RBA Governor to delivery testimony to parliament today.
Thursday saw former Deputy PM Julie Bishop announce that she won’t seek re-election for the seat of Curtin in WA and will step down from politics. Today the RBA Governor Lowe will testify in parliament and no doubt will address many of the concerning economic headlines that have been across news wires in the last 24 hours. His testimony today as the potential to send the AUD even lower as he is unlikely to deviate from his comments made at the National Press Club back on the 6th February when he said the next rate move at the RBA was evenly balanced between a cut or a hike. Traders were expecting the next move would be up, so a shift in sentiment sent the AUD lower after his remarks. His testimony will begin at 9.30am AEDT.
How to Avoid Being A Losing Technical Analysis Trader.
The biggest mistake retail traders make is not taking the time to learn how financial markets really work. They are fascinated by charts and patterns which are easy to understand and very visual. But they avoid learning about how fundamentals impact the asset class they are trading. It’s just DUMB to spend hours and hours trying to learn something that 98% of people fail at which is trading only using technical analysis. Here is what you should be studying and learning and I am more than happy to help everyone avoid failure and succeed handsomely but it starts with spending less time in front of charts.
US markets are lower as I write.
With an early morning flight back to the Sunshine Coast I am writing this report at 5.00am Adelaide time and the Dow Jones Index is down 150 points on the back of weaker than expected US economic data. This won’t help emerging market currencies or Asian markets today who have been eagerly waiting on a positive conclusion to US / China trade talks.
I will finish today’s report by simply saying this. Being short on the Aussie Dollar right now will eventually become an overcrowded trade in my opinion and when I see price action as we have seen in the last 24 hours we usually see at some point in the next 24 – 48 hours a short squeeze. This is when some positive fundamental news occurs (a trade deal between the US and China) which spikes the AUD back higher and scares the crap out of those traders that have all jumped on the “let’s short the AUD” bandwagon.
Make a concerted effort to value your time more than you do. AB
About the Author: Andrew Barnett
Andrew is a professional trader and successful investor who has a strong focus on education. He is a regular Sky News Money Channel Guest and one of Australia’s most awarded and respected financial experts and is regularly contacted by the Australian Media for the latest on what is happening with the Australian Dollar. Director at LTG GoldRock, Andrew Barnett, guides thousands of traders around the world in the live market on a daily basis, advising them on buy and sell directions, as well as trading his own personal account. Andrew, a regular keynote speaker at trading and wealth-creation events throughout the Asia Pacific region, is an authorized representative registered with the Australian Securities and Investment Commission (ASIC).
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