If a Global Recession is Coming, the Australian Dollar May See It Early
By:Ilya Spivak
Australian dollar price swings echoed the seesawing stock markets in July and August.
Financial markets are betting on RBA rate cuts, but the central bank is resisting.
Incoming inflation data may provide a telltale clue about risks to local and global growth.
The rapid ups and downs of Wall Street in July and August have appeared in nearly perfect parallel in Australian dollar price action. The currency sank against its U.S. counterpart as swelling recession fears gripped financial markets but then mounted a spirited rebound along with stocks after a crescendo sell-off on August 5.
This has brought prices to a decisive level. After a blistering three-week rally, the currency now trades within a hair of July’s peak just above the 0.68 figure. A daily close above this barrier may set the stage for extension higher to the December 2023 high, which sits a bit below the 0.69 mark.
Immediate support appears to be at the 0.67 threshold. A move lower that re-establishes a foothold below this barrier would put prices back into a familiar congestion area where they have been finding friction at least since the beginning of the year. Its lower bound appears to be just under 0.66.
Incoming economic data may define how the currency resolves itself at this crossroads. Economists expect to see that Australian inflation slowed for a second consecutive month in July. The monthly consumer price index (CPI) gauge is penciled in for a downtick to 3.4% year-on-year, the slowest since February.
This lines up with recent clues appearing in leading purchasing managers’ index (PMI) data. It showed that “the rate of output price inflation softened to the slowest since January.” Meanwhile, “higher raw material, transportation and labor costs [led] input prices to rise at the fastest pace in 17 months.”
The disparity comes as “firms opted to lift prices at a weaker pace in an effort to boost sales,” with Australian businesses “finding it difficult to pass on [cost pressures].” That is a worrying sign of demand erosion that might help explain a sharpening divergence between where the markets and the central bank think interest rates are going.
As it stands, the markets are pricing in one standard-sized 25-basis-point (bps) rate cut for 2024. By contrast, minutes from the Reserve Bank of Australia (RBA) policy meeting in August revealed officials considered a rate hike before opting to remain “higher for longer” to press down on sticky prices.
With all of this in mind, a soft local CPI reading bodes doubly ill for the Australian dollar. First, it would suggest the markets’ dovish leanings are well-founded and signal the RBA has some repositioning to do in the months ahead. Second, it would speak to an unwelcome business cycle turn in a pivotal economy, which may spook risk appetite.
Australia is one of the world’s top commodity exporters, making it a crucial node near the start of the global supply chain. If the break in cost transmission is an early signal of weakening demand among Australian consumers, that may amount to an ominous sign of uptake downstream and add to mounting fears of a worldwide downturn.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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