AUD/USD stabilizing as Dollar takes a knock down to size

AUD/USD is trading at 0.6756 between a low of 0.6687 and 0.6760, higher by 0.60% following a poor US ISM manufacturing PMI at a 3-year low of 49.1 and a steady hand from the Reserve Bank of Australia (RBA). 

As expected, the Reserve Bank Board left the cash rate unchanged at 1.0% at last night's meeting. While the RBA was expected to hold, it was the statement that the market went to and the all-important final paragraph that was slightly changed from the previous August decision statement and the minutes of the August meeting.

 “The board will continue to monitor developments, including in the labour market, and ease monetary policy further if needed to support sustainable growth in the economy and the achievement of the inflation target over time”. 

 - the statement read. 

"Given that Westpac is expecting the Board to cut rates by a further 25bps at the next meeting in October, we would have liked to have seen the term “if needed” excluded from the decision statement - The term “if needed” could be interpreted as requiring more time than one month to decide on the next cut. However (realistically) the Board should not lock itself into a specific strategy one month out from the next meeting. By maintaining the “if needed” qualification, it provides itself with flexibility," analysts at Westpac explained and hence the AUD went bid, especially when compounded with the comment on housing - “further signs of a turnaround in established housing markets”.

Recessionary data knocks the Dollar

As for the Dollar side, the US released a key measure of what the market can use to assess the economy by, with respect to the mounting expectations that the US is indeed headed towards a recession, potentially imported by external factors as well as a slowdown domestically. The US ISM manufacturing index, as noted by analysts at ING Bank, "has historically been one of the best lead economic indicators and the fact all the main components are now in contraction territory is a major cause for concern."

The ISM manufacturing index arrived at 49.1 for August versus 51.2 in July which was the first sub-50 reading since August 2016 and is the weakest figure since January 2016. "This is a clear disappointment that will provide further fuel to the market and President Trump’s desire for further Federal Reserve interest rate cuts," analysts at ING Bank argued, and it just goes to show that with new tariffs coming into effect and the global backdrop continuing to weaken the threat of a recession is rising.

AUD/USD levels