AUD/USD: Pumped up trade wars will be a major adversary for the RBA next week

• AUD/USD  sinks  to daily lows on trade war concerns ahead of RBA next week.
• Nonfarm payrolls next major catalyst, but trade wars and currency wars taking the limelight.  

AUD/USD has dropped to a fresh low of 0.6795 following today’s antagonistic announcements from the US president who has seemingly retaliated to what he considered as a let down by the Federal Reserve governor, Powell.

• Breaking: Trump to impose additional 10% tariff on remaining $300 bln of Chinese imports to US starting Sept 1

The Fed’ cut rates but were staying on the side of not wanting to ease rates too much too soon. It was an insurance cut, rather a response to anything that warranted immediate or drastic action, such as a recession would require.  

Powell said, that the Fd’s action was due to:

• “Weak global growth, trade policy uncertainty and muted inflation have concerned Fed.”
• “Trade policy tensions have returned to a simmer.”

Following the announcements, Trump tweeted that  

“….As usual, Powell let us down, but at least he is ending quantitative tightening, which shouldn’t have started in the first place – no inflation. We are winning anyway, but I am certainly not getting much help from the Federal Reserve!”

What the Market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle which would keep pace with China, The European Union and other countries around the world….”

We will now have to wait for the Chinese reaction.

Will the RBA now need to make their own insurance cut?

However, what does this all mean for central banks? We have the Reserve Bank of Australia next week and this might have raised some eyebrows there, while otherwise, the market was leaning more towards the expectancy that the bank would not need to cut rates so soon.  

The latest Trimmed Mean Inflation for Q2 printed in line with expectations (market’s and the RBA’s). The  headline inflation was slightly stronger than the market expected though and  governor Lowe’s latest speech which was last week suggested the RBA was  prepared to ‘watch the data’ for a period to determine whether “we’re going to need further stimulus”. That meant it gave  more time before action was  required and a move next week now seemed  materially less than a 50% probability. However, if trade wars are going to blow up and if there is a currency war in the making, perhaps the RBA might b as prudent as the Fed was yesterday to cut interest rates as soon as next week, which will likely send the Aussie on a further trip to the downside.  

Nonfarm Payrolls had btter be a blockbuster or the Dollar is in for a rough ride

However, before the RBA we have Nonfarm Payrolls which is the next major catalyst for the pair which might just throw the Dollar a life ring as the ship appears to be sinking.    US confidence is strong and the US labour market remains incredibly tight but  there is a concern that a weaker global economic backdrop and ongoing uncertainty surrounding trade will act as a brake on US growth for which the Fed has preempted in yesterday’s cut. The jobs data better be a blockbuster report if it is to instil any confidence to the Dollar. However, as analysts at ING Bank noted, “after June’s incredibly strong jobs growth of 224,000, which was above every one of the 75 forecasts in Bloomberg’s survey of analysts, there is obviously the risk of a softer outcome for July.”

“We are looking for 170,000, which would be broadly in line with the six-month moving average,” the analysts wrote.    

AUD/USD levels

Meanwhile, from a technical perspective,  AUD/USD has eroded the 2019 uptrend at 0.6857 and sold off the  below  mid-June low at 0.6832 with eye son the 0.6738 January 2019 low and 0.6725, the 2016-2019 support line.