Fundamental Analysis: Australian dollar falls 10-year lows


The Australian dollar fell sharply in the early morning hours of GMT following a sharper-than-expected rate cut in New Zealand. The Australian dollar was already under pressure on most of the correlated currency symbols due to heightened trade tensions. Given these drawbacks, Australia posted a new record surplus of over A $ 8 billion. The Reserve Bank of Australia also left the rate unchanged at 1%.

The currency symbol AUDUSD hit its lowest level since 2009, below the 0.67 level this morning. The picture was similar to that of the Australian dollar versus the other major currencies. The EURAUD rose above 1.674, its highest level since summer 2015. The AUDJPY reached its lowest level below 71.00 in 2019.

Big RBNZ rate cut shocks markets

It was absolutely unlikely that New Zealand’s central bank would cut the interest rate by half a percent. A 0.25% cut was expected, but further easing by New Zealand’s central bank should put pressure on the Reserve Bank of Australia to lower the Australian dollar as well. The base rate is currently 1% in both countries, which is a record high in both cases.

There has been a lot of downward pressure on the Australian dollar in recent days due to high trade tensions. Donald Trump’s tweets announcing new tariffs on all duty-free Chinese products negatively impacted global trading currencies such as the Australian dollar. The main reason for this is Australia’s heavy dependence on trade with China, especially on exports of raw materials such as iron.

Meanwhile, iron ore (Tianjin 63.5%) has fallen about 18% from its multi-year highs. Major commodities fell more than $ 124 / MT last month to around $ 101.50 in today’s Asian session.

Iron ore and coal prices are very important to the value of the Australian dollar because of the large role these minerals play in Australia’s exports. About 30% of the total value of Australian exports comes from iron ore and coal, one of the highest in the world.

Some support from national trade data

Given all of these negatives, Australia posted a record trade surplus today. The trade balance for June was over A $ 8 billion this morning, up from a previous level of A $ 6.2 billion. That number is also well above expectations for a drop of about $ 5.7 billion.

Behind this data, trade between Australia and China appears to be booming. This could actually be due to the trade war between China and the United States. As China’s trade with the United States becomes more expensive, it is natural for many of them to look for alternative markets. It’s worth noting that the gap between Australia’s imports and exports to China is still widening in favor of exports.

Next Friday’s monetary policy statement under the microscope

The main news for the Australian dollar for the remainder of this week will surely be the release of its RBA monetary policy statement next Friday. At 1.30 a.m. GMT. Traders will likely focus on the following hot topics:

Trade disputes

Reducing financial conditions in New Zealand and elsewhere

Business data outlook

Australia’s trade balance

While an indication of when the next RBA rate change is highly unlikely, a cut within the year is likely. Likewise, despite this morning’s impressive trade balance, the Reserve Bank of Australia could be cautious.

Traders will likely study Chinese data for the rest of this week as well. The two most important releases are the July trade balance tomorrow at 3:00 GMT and the July annual inflation at 1.30 a.m. on Friday. Although the latest numbers on these data will remain stable, China’s trade balance is expected to decline by more than $ 10 billion.

The worst could be over for the AUD

Given fundamentals in general, the reaction to the news from New Zealand this morning seems excessive. Strong trade data from Australia could fuel the Aussie’s rally, though that will depend on comments from the RBA next Friday. However, traders should watch the major technical levels on the AUD charts for a clearer view of the trends to come.

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