USD gains on increased trade risks, first CA surplus in 44 years in Australia

Summary:

• US dollar rises across the board following the news that the US and China struggle to agree on when to meet to continue trade negotiations
• Reserve Bank of Australia kept interest rates unchanged as expected and expressed readiness to act if necessary
• In Q2 Australia posted its first current account surplus in 44 years on the back of a surge in iron ore prices
• Boris Johnson promises to boost public spending adding that he does not want general elections

Crunch time

The US dollar is leading the gains while SP50 future are falling 0.6% in response to the news which came yesterday evening afternoon that the United States and China are struggling to agree on when to meet to continue trade negotiations. This came after Washington rejected a Chinese request to delay tariffs implemented on September 1. Despite these difficulties in setting the date when officials from both countries could meet, it does not mean that a meeting will not take place this month at all, according to people familiar with the matter cited by Bloomberg.

After breaking through 97.90 the US dollar index (USDIDX on xStation5) seems to be en route to as high as 100.50. Source: xStation5

On hold

In line with expectations, the Reserve Bank of Australia kept interest rates unchanged during its September meeting. The Aussie dollar gained following the decision and now it is trading prettly flat against the US dollar, meaning that it is quite resilient to widespread strength of the US currency (the Bloomberg USD index is up almost 0.4% at the time of writing this commentary). In its statement the RBA reiterated its readiness to ease policy further if needed in order to support sustainable economic growth. Moreover, it also ensured that interest rates could remain low for an extended period of time. In terms of the economic backdrop, the RBA underlined that risks to the global economy were tilted to the downside, nevertheless financial conditions remained still very accommodative. As far as the domestic economy is concerned, the Australian central bank suggested that price growth was likely to be subdued for some time and for that reason, among others, consumption remained main domestic uncertainty (it seems to share the view that consumers might hold off on purchasing in exchange for boosting their savings). The central bank noted that the Aussie dollar was at its lowest level in recent times (in theory, it could also act toward higher inflationary pressures throughout currency pass-through). It appears that the RBA is neither happy nor downbeat with the current level of the Aussie, hence it is unlikely to see the RBA turning toward more hawkish rhetoric.

The EURAUD seems to be poised to head lower in the near-term as the first obstacle is localized nearby 1.59. Source: xStation5

Iron ore boosts Australian trade

In the three months through June, the Australian economy managed to post its first current account surplus in 44 years (5.9 billion AUD). The prime reason behind it was a surge in iron ore prices caused by supply disruptions as well as record Chinese steel production. The result topped expectations as the Bloomberg median estimate had called for a 1.5 billion AUD surplus. Looking forward, it is highly unlikely that Australia will be able to keep running above zero taking into account a massive reversal in iron ore prices recently. In our view, the surplus reached in the second quarter may have also had something to do with weakness in the Aussie.

Australia reported its first CA surplus in 44 years. Source: Bloomberg

In the other news:

• Boris Johnson promised on Monday to boost public spending adding that he did not want general elections, nevertheless if Johnson loses a crunch vote in the British parliament today, he will attempt to trigger a snap elections vote on October 14