Aussie dollar continues recovery
The Australian dollar (AUD/USD) finished higher last week at .6669 (+1.38%), continuing its recovery from a nine-month low. This was driven by improved risk appetite, hawkish signals from the Reserve Bank of Australia (RBA), and the latest job report showing the Australian labour market remains in good shape.
AUD/USD rally defies iron ore slump
The rally in AUD/USD was particularly notable as it occurred despite a 9% tumble in Iron Ore ore prices, Australia’s top export, due to growing concerns about Chinese demand. Iron ore, essential for steel manufacturing, is widely used in construction, including residential properties.
China’s property market woes intensified last week, with housing prices plunging 4.9% year-on-year in July, following a 4.5% decline the previous month. This marked the 13th consecutive month of falling prices and the fastest drop since June 2015, despite Beijing’s ongoing efforts to cushion the prolonged property slump.
Adding to the concerns, the Chairman of Baowu Steel, the world’s largest steel producer, accounting for 7% of global output, described the current conditions as a “harsh winter,” warning that it will be “longer, colder, and more challenging than we had anticipated.”
Key drivers for AUD/USD this week
While the situation in China continues to simmer, the key drivers of AUD/USD this week will likely be risk sentiment, the Jackson Hole Economic Symposium, and the minutes from the RBA’s August board meeting.
RBA meeting minutes
Date: Tuesday, 20 August at 11:30am AEST
At its August board meeting, the RBA kept its official cash interest rate on hold at 4.35%, as widely expected. In the accompanying statement, the RBA maintained a hawkish stance, noting that while inflation is easing, it remains well above the midpoint of the RBA’s 2-3% target range.
The RBA highlighted that quarterly underlying inflation has been above the midpoint of the target for 11 consecutive quarters and “has fallen very little over the past year.”
Bullock’s hawkish tone contrasts with market expectations
Since the recent board meeting, RBA Governor Michele Bullock has continued to sound hawkish. Speaking to a parliamentary panel last week, she stated it would be “premature to be thinking about rate cuts.” The RBA meeting minutes are expected to echo this hawkish sentiment.
However, the rates market presents a different outlook, anticipating a rate cut as the RBA’s next move, with 21 basis points (bp) of cuts priced in by year-end and three full 25 bp cuts expected by July 2025.