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Monthly Wrap: Stronger inflation fails to boost Australian dollar as trade tensions rise

currency-newsMonthly Wrap: Stronger inflation fails to boost Australian dollar as trade tensions rise
Key Takeaways:
 
  • Australian inflation beats forecasts to accelerate to 1.6%
 
  • Escalating US-China trade dispute weighs heavily on Australian dollar
 
  • AUD Monthly lows: £0.55, €0.59, $0.66, C$0.89, NZ$1.02
 
  • AUD Monthly highs: £0.56, €0.62, $0.70, C$0.92, NZ$1.05
 
An unexpectedly solid uptick in the second quarter Australian consumer price index failed to shore up the Australian dollar for long.
 
Even though the headline inflation rate rose from 1.3% to 1.6%, moving closer to the Reserve Bank of Australia’s (RBA) 2% target, the improvement’s positive impact on AUD exchange rates proved short-lived.
 
While a higher inflation rate gives the RBA less incentive to cut interest rates again the risk of further monetary loosening remained thanks to the increasingly dovish nature of other central banks around the world.
 
With global monetary policy looking set to loosen RBA policymakers could come under pressure to follow suit, to the detriment of the Australian dollar.
 
A fresh souring in US-China trade relations also put pressure on AUD exchange rates last week, as the Trump administration announced its intention to impose a fresh 10% tariff on Chinese goods.
 
This latest escalation in the trade dispute naturally rattled investors, leaving the risk-sensitive Australian dollar on the back foot as concerns over the global growth outlook mounted.
 
Even so, an improvement in July’s NAB business confidence index could help to limit the downside potential of AUD exchange rates next week.
 
Evidence that domestic sentiment picked up in spite of increasing global anxiety would offer the Australian dollar a solid short term rallying point.
 
A higher level of consumer confidence may also boost AUD exchange rates, as higher levels of consumer spending would raise the odds of a stronger gross domestic product performance.
 
If the RBA shows greater signs of caution at its September policy meeting this could drag the Australian dollar down across the board.
 
The prospect of interest rates falling to a fresh record low would leave investors with little incentive to buy into the antipodean currency, especially if US-China trade relations continue to sour.
 
Any acceleration on display in the second quarter gross domestic product could help to shore up AUD exchange rates, however.
 
A stronger showing here would help to ease concerns that the deteriorating global trade situation has dragged on domestic growth, giving the Australian dollar fresh cause for confidence.
 
Philip McHugh

Philip McHugh

Joining the corporate trading desk in 2007, Phil now over sees all of Currencies Direct’s corporate dealing activity. Having gained experience working with hundreds of businesses to optimise international payments processes and execute comprehensive risk management strategies, Phil currently works with a portfolio of corporate clients whilst managing Currencies Direct’s overall market exposure

Phil has FCA approval and has completed the Certificate in International Treasury Management (CertiTM)

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