Aussie stays low despite the resilient Chinese exports data

Unemployment rate figures show that unemployment increased drastically in July, sitting higher than usual in the United States. The question is that whether it is time for the Reserve Bank of Australia (RBA) to take decisive action.RBA intend to remain cool towards the end of the year by holding the rate unchanged at 2.5%. Employment report was weak in general, but there is still positive news.

1) Numbers of Full time workers increased, an offset by the decrease in part time works.

2) Participating rate has increased, indicating that more people have joined the labour force.

The spike of the unemployment rate could also be partly due to the sample rotation. As the inflation still stays in the upper band of the RBA's target range, RBA has limited scope to ease at this moment. We cannot expect much shift in its language for the coming September meeting.

Today's data certainly raises the warning to the Australian economy outlook and its currency which is still the top performer among the G10's. Australian recovery still heavily depends on the Chinese recovery in our point of view. We saw that there is a recent rising in optimism according to the Chinese economy data, but we remain cautious on its sustainability as the resilient data is largely driven by the government targeted stimulus. Industrial Demand in China remains tepid and it is unlikely to largely benefit the Australian commodity exports without a broad base stimulus.

Australia export volume has a very large correlation with the iron ore price in the past 5 years. Overcapacity is severe in the Chinese steel sectors so we do not see this as a positive catalyst to the Australian economy.

No single policy works all time in the different cycle. I think that is the similar issue to what these 2 economies are facing now. Post-euro zone debts crisis in the past 2 years as well as the European Central Bank (ECB) has lowered the benchmark lending rate close to zero. However besides boosting the confidence and lowering the borrowing cost, it did very little to boost the credit demand when the lending to non-financial sectors has shown no signs of picking up. That's how we see its recent inflation to fall on a near 5-year low.

In Australia, Official Cash Rate (OCR) rate cut has been spurring the lending amount, including that of those commercial lending. But I think the Government should take a bigger role to aid RBA's action, as the country urgently needs to seek revenues such as structural improvements after the commodity has been peaked and the substantial lesser demands from China. I do not think RBA can do much here.

ECB Press conference overnight looks like there were no extra measures being introduced. Draghi still needs some time to exanimate the previous easing that was announced two months ago.

Uneven growth in the currency bloc becomes more and more obvious from the latest reading of the Purchasing Managers' Index (PMI) data this week, meanwhile confidence indices in both Germany and Euro Zone have been dropping since 1Q this year.

Now geopolitical risk such as the sanction between EU and Russia sets to pose the extra deflation risk in the Euro zone, as well as the expectation on an ultimate Quantitative Easing (QE) program could rise toward the end of the year, is driving the euro lower in a medium term when the dollar demand holds well.