Consumer Price Index, Inflation, Australia-China tensions, RBA, Covid-19 – Talking Points:
- The Australian Dollar initially dipped as inflation data showed the local economy had entered deflation in the second quarter of 2020.
- Stalling commodity prices may weigh on regional risk assets as the GSCI commodity index struggles to break key resistance.
The Australian Dollar slid lower after quarterly inflation data showed the Australian economy had fallen into deflation in the second quarter of 2020.
Although exceeding market expectations of a 2% drop, the consumer price index (CPI) fell 1.9% in the three months through June, driven by a collapse in oil prices and supportive intervention from the government.
The quarterly trimmed mean gauge declined 0.1% resulting in a yearly increase of 1.2%, undershooting expectations of a rise of 1.4%.
This release should do little to sway the stance of the Reserve Bank of Australia as the central bank “determined that it would not increase the cash rate target until progress is made towards full employment and it is confident that inflation will be sustainably within the 2-3 percent target band”.
AUD/USD daily chart created using TradingView
Covid-19 Cases Weighing on Investor Sentiment
The Reserve Bank of Australia’s stance on negative interest rates, rising commodity prices and successful suppression of the coronavirus outbreak locally served as major drivers of the trade-sensitive Australian Dollar’s rally to fresh yearly highs.
However, case numbers have surged in Victoria, Australia’s second most populous state, forcing Premier Daniel Andrews to reimpose ‘stage-three’ lockdown restrictions on July 7.
So far, these restrictions have failed to limit the spread of the highly infectious virus and may lead to an extension of the economically devastating restrictions, as Andrews flagged that if cases “continue to go up and up [a] six-week shutdown will not be for six weeks”.
With current restrictions estimated to cost the local government $1 billion a week and the state accounting for “about a quarter of the national economy”, Treasurer Josh Frydenberg believes the inability to ‘flatten the curve’ of infections is a “serious impediment to the nation’s recovery, not just Victoria”.
Therefore, regional investors should continue to monitor local health developments, with a potential extension of lockdown measures perhaps triggering a surge of risk aversion and weighing on the performance of the Australia dollar.
Source – Covid19Data
Stalling Commodity Prices May Hamper the ASX 200 Index, Australian Dollar
Furthermore, weakness seen in the Goldman Sachs Commodity Index (GSCI) could anchor regional risk assets as price struggles to break above key resistance.
Granted, an explosive surge in precious metal prices seems to have steadied the ship for local equity investors, with gold climbing to fresh record highs and silver breaking above the $26/oz mark for the first time in seven years.
However, the price of copper – known as a proxy for global growth – has notably stalled in recent days amid escalating tensions between the “Five Eyes” alliance and China which threaten to derail global trade relations.
Correlation Matrix (2019-Present)
Data Source – Bloomberg
With that in mind, traders may keep an eye on the performance of the GSCI index as it attempts to fill the March breakaway gap (346.80).
Inability to do so could result in a sharp correction lower, potentially coinciding with a rapid discounting of the commodity-sensitive Australian Dollar and ASX 200 index.
S&P GSCI Daily Chart – Struggling at Key Resistance
S&P GSCI index created using TradingView
Developments with China Continue to be Monitored
Looking ahead, traders should continue to monitor developments between Australia and China, its largest trading partner, as vitriolic rhetoric could escalate into targeted tariff impositions.
With Foreign Ministry spokesperson Wang Wenbin condemning the “wrong actions of Canada, Australia, and the UK in politicising juidicial cooperation with Hong Kong”, retaliatory escalation looks to be a likely outcome.
To that end, a breakdown in trade relations could end the Australian Dollar’s tremendous 4-month rally and potentially trigger a period of sustained risk aversion.
— Written by Daniel Moss, Analyst for DailyFX
Follow me on Twitter @DanielGMoss
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