Australian Dollar Rises Despite Drop of Consumer Confidence to 4-Year Low, Escalating US-China Trade War

The Australian dollar rose today against other most-traded currencies. That is a surprising result considering that fundamentals looked very unfavorable to the currency. The sentiment of Australian consumers fell to the lowest level in four years. Washington announced fresh sanctions against Chinese companies just a day before trade negotiations between the United States and China resume.
The Westpac-Melbourne Institute Index of Consumer Sentiment fell 5.5% in October, falling to the lowest level since July 2015. The report noted that it is a bad sign considering the recent interest rate cut, which should have improved the confidence of consumers:

This result will be of some concern to the monetary authorities. Typically, an interest rate cut boosts confidence particularly around consumers’ expectations for and assessments of their own finances.

Talking about interest rate cuts, the report predicted another reduction but not at the next meeting:

The Reserve Bank Board next meets on November 5. Westpac expects the Board will decide to keep the cash rate on hold. Despite this unexpected plunge in the Index the Board is likely to take some time to assess the impact of the three rate cuts before deciding to move again. As we discussed in this report, they will also be alerted to the impact that reductions in the cash rate to well below historical lows may be having on consumers’ assessments of the economy. In particular, the signals around how consumers are assessing their own finances are worthy of detailed consideration before the Board embarks on its next move.

Westpac expects that next move will be a further cut in the cash rate to 0.5% in February next year although a case can be made for an earlier cut in December depending on developments in the labour market and the global economy.

Released yesterday by National Australia Bank, the business conditions index rose from +1 to +2 in September. The business confidence index, on the contrary, fell from +1 to 0. Alan Oster, NAB Group Chief Economist, commented on the result:

The results of the September survey suggest more of the same for the business sector. Conditions edged up, and confidence was marginally lower, but both remain below their long run average – well below the levels seen just over a year ago. This suggests that activity in the business sector has slowed and we fear the risk that this spreads to both investment and employment intentions.

Meanwhile, markets were digesting the news that the United States blacklisted several Chinese companies, preventing them from buying US technology and selling to US markets. The move just before the resumption of trade talks drew heavy criticism from some people. Max Baucus, former US ambassador to China, told CNBC:

You don’t do these things prior to negotiations. It does not set a good tone, that’s tactically. Strategically, all these actions — I think — are causing the Chinese to wonder: ‘What is the US’ real motive here?’

Taimur Baig, chief economist at DBS Group Research, echoed such sentiment:

There are ways of putting pressure — back channel diplomacy, implicit threats and so on, but this is very explicit (and) very noisy.

AUD/USD gained from 0.6727 to 0.6745 as of 9:28 GMT today. EUR/AUD was little changed at 1.6282. AUD/JPY rallied from 72.02 to 72.34.

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