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  • Recession coming up on protracted trade wars between US and China.
  • AUD/USD to take the brunt of a global slow down and pressure the RBA to cut deeper.

WA Today has published an  article that states that the Commonwealth Bank, HSBC and Citi are betting that Australia’s central bank will cut interest rates more steeply than previously thought as global trade tensions ratchet up and domestic hiring intentions slow.  

Lead  paragraph

Economists at CBA, Australia’s biggest bank by market capitalisation, said in a note on Thursday they expect one 25 basis point (bps) easing in November followed by a second in February, taking the key rate to 0.5 per cent. Earlier, they had predicted just one cut to 0.75 per cent.

HSBC and Citi followed up with a similar predictions of two cuts.

HSBC had expected the Reserve Bank of Australia (RBA) to halt its current easing cycle after two back-to-back reductions in June and July to a record low of 1 per cent. Citi had earlier forecast another easing to 0.75 per cent.

Conclusion

The protracted Sino-US trade war has fuelled fears of a global recession, hammering financial markets overnight and pulling yields on 10-year Treasuries below those on two-year paper. That inversion of the curve has been a reliable predictor of recessions in the past.

Financial markets are pricing in policy easing by all major central banks.

“The global backdrop looks more risky,” Citi economist Josh Williamson said.

FX implications:  

The Australian Dollar benefitted from a solid jobs report, but it faces plenty of road bumps along the way up and once it’s got over those, there is a mountain to climb. Tradewars show no sign of a truce at this juncture and global growth forecasts are deteriorating. The Aussie trades as a proxy to the commodity markets which are under pressure. AUD/USD will find a touch time in correcting higher, so long as trade wars persist and the US consumer keeps on consuming.