Aussie ended up in nominal world

Australian economy is actually stronger than it seems

Do not trust your eyes, trust your ears. Australia is a controversial country; it is one of the few countries where the official reports indicate a decline in the economic expansion, but people actually live better than previously. It is really surprising that the trade surplus of A$14.7 is the largest on record and even have gifted Australia its first current account surplus in four decades but its export expressed in real terms actually subtracted (!) 0.1% from GDP! In the fourth quarter alone nominal exports added 0.8% to growth; and the annual growth in nominal GDP accelerated to a brisk 5.5% in the same quarter, far above the real 2.3% GDP rate. The matter is that we all live in the world of nominal money, and economists are used to adjusting the statistics to inflation.

When iron ore alone climbed almost 13% in the January-March period and 25% on a year earlier, it is not surprising that Australia’s export prices were 15% up. Taking this into account, the contribution of foreign trade into Australian GDP seems to be little, but it isn’t so in fact! As the shares of commodity producing companies surged in price, the ASX 200 has risen A$200 billion in value so far this year and companies will be paying more than $29 billion in dividends from February to June, much more than in the same period in 2018. The rally of iron ore suggests that the Aussie is an undervalued currency.

Dynamics of AUD/USD and Iron Ore

Source: Investing.

In the past years, when there was a divergence between the nominal and the real GDP, Australia’s growth accelerated. RBA also remembers this, so the officials find arguments for retaining the interest rate at 1.5%. In early May, Phillip Lowe ignored the weakness in inflation, sliding down from 1.8% to 1.3 in the first quarter, and stressed the strength of the labor market. After it was reported that the unemployment rate was up to 5.2% in April, the highest value in the past eight months, the derivatives market has increased the chance for the RBA interest rate cut in June up to 50%. Investors expect that the cash rate will be at a record-low 1% by the end of 2019 amid the weakness of Australian economy and unfavorable foreign environment. Will the Reserve Bank of Australia try to dissuade them?

I should note that it is disappointment that has become the major driver, pressing the AUD/USD down to the lowest levels since the flash-crash in January. Investors were confident that the US-China trade war would end in May. That’s not what happened in fact. As a result, the yuan has plunged to a new low, being followed by the Aussie.

Dynamics of AUD/USD and USD/CNY 

    

Source: Investing.

According to Columbia Threadneedle Investments, the People’s Bank of China will have to sell the US Treasury bonds in order to protect the yuan from a further decline. And it has already started. For the first time since November, China’s holdings of U.S. Treasuries have declined by $10.4 billion, down to the 2-year low of $1.12 trillion. I suppose that the AUD/USD bulls will manage to draw the pair into consolidation in the range of 0.685-0.705 as Donald Trump wants to reassure the US stock market, Beijing wants to stabilize the yuan, and the political risks in Australia will ease after the  Australian federal election on May 18.


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Price chart of AUDUSD in real time mode

Aussie ended up in nominal world

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