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FINANCIAL UPDATE WITH MONEYCORP

4 Jan 2019

Michael Turnbull replaced after by-election

A by-election in Australia to replace Prime Minister Malcolm Turnbull, delivered an independent to fill his shoes. It means Scott Morrison's coalition has lost its one-seat majority. However, the new MP voted in after Turnbull’s departure said she would not go against the government in a confidence vote so the Aussie was not unduly troubled. It was 0.4% lower against sterling on the day, unchanged against the Swiss franc and US dollar but there was no long-term influence due to a change at the top.

Reserve Bank of Australia holds steady

Headline inflation slowed to 1.9% in the third quarter, in line with forecasts. The Reserve Bank of Australia kept its benchmark cash rate unchanged at 1.5% in October and its statement offered no hint that an increase is in the pipeline. The statement knocked the Aussie back a little but it was still fractionally ahead on the day. Whilst it effectively amounted to no change in market guidance, the reminder in the statement that the rate is unlikely to change this year dented the Aussie slightly. The RBA held to this promise and the rate remained unchanged throughout the quarter. There was a bigger impact from the US Federal Reserve decision this quarter. A widely-telegraphed increase to its benchmark interest rate was accompanied by an unexpectedly hawkish statement, which hinted at two more rate hikes next year and another in 2020. Investors worried that the Fed might be going too far and that it could have a braking effect on the global economy which would reduce demand for commodities.

Good news and bad news on the US-China trade war

News that Chinese data beat expectations despite the ongoing tussle over tariffs seemed to help the Australian dollar, which has been weighed down by the ongoing trade dispute. In addition, a lull in the equity rout helped risk appetite in general. There was a lot of news and some discussion but very little concrete action regarding the trade war this quarter, but it’s clear that the Aussie is influenced by the situation. A comment from president Trump that America could get "a great deal" on trade even though China isn't yet ready for a deal meant that the Australian dollar moved higher, eventually adding a quarter of a cent against sterling. However, reports of a trade deal between Washington and Beijing looked ever less plausible as the White House failed to spell out what had been agreed. Further strong economic numbers from China proved positive for the Australian dollar. However, the Aussie has been volatile and struggling due to the potential impact of the US-China trade war. If no resolution can be found, there could be longer-term implications to the dispute which ripple across world trade.

Domestic data highlight employment as a positive

At the beginning of the quarter, Australia’s unemployment rate held steady at 5.0%, the lowest level since 2012, as the number of people in work increased to 33,000 in October, higher than the expected number of 20,000. There had been some hope that the numbers would increase the bullish outlook of the RBA in the future, but while Guy Debelle, deputy governor of the Reserve Bank of Australia, said in a speech that the Australian "labour market is in pretty good shape" he offered no pointer towards tighter monetary policy. The numbers still spelt good news for the Aussie as investors focused on that number rather than the monthly addition of 5.6k jobs, which was fewer than forecast and it proved good news for the Australian dollar. It wasn’t all good news. Business and consumer confidence were both softer than expected. Construction work completed was down by 2.8% in the third quarter, a far cry from the expected 1.0% increase. Private capital expenditure - business investment - also fell by 0.5%, having been forecast to increase by 1.0%. To complete the triangle of disappointment, new home sales fell 0.8% in October. Australian mortgage lending was up by a useful 2.2% in October even as it was reported that house prices had fallen by 1.5% in the third quarter. New home sales increased by a useful 3.6% in November and 37k jobs were created in the same month, though that was not enough to prevent unemployment ticking up to 5.1%.

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