Australian dollar gains ground, but unstable global growth and policy tightening dominate trade

The Australian dollar was just below 69 cents on the dollar, having fallen 3.5 percent last week in the biggest weekly drop in two years. The People’s Bank of China cut key lending rates by between five and 15 basis points on Monday to stimulate borrowing in an economy hit by a housing crisis and a zero-COVID policy.

The yuan fell to its lowest level in two years.

The central bank’s move followed last week’s introduction of special loans for property development projects that are at risk of not being completed due to financial constraints.

Joseph Capurso, head of international economics at Commonwealth Bank, said the interest rate cuts were part of the same campaign to support the economy. “Nobody expects the Chinese economy to reach the official growth target of 5.5 percent this year,” he said. He forecasts that the Australian dollar will retreat to US67¢ by Christmas.

The Australian dollar is considered a liquid indicator of Chinese growth, and China is Australia’s largest export market.

pivot hopes

More aggressive comments from a US Federal Reserve official on Friday reinforced the idea that further tightening is needed to overcome escalating inflation. But financial markets are not so easily convinced, with some hoping the Fed will soon switch to a dovish policy environment.

Richmond Fed President Thomas Barkin said the Fed’s efforts to rein in inflation could lead to a recession, but that it need not be a “dire” drop in economic activity.

Fed officials have warned in recent weeks that the US central bank must continue to raise borrowing costs to counter rapidly rising cost-of-living pressures.

Investors will now focus on Fed Chairman Jerome Powell’s appearance at the annual global central banking conference in Jackson Hole, Wyoming on August 26.

Fed funds futures traders are pricing in a 53 percent chance of a 0.5 percentage point increase in the fed funds rate in September, and a 46 percent chance of a 0.75 percentage point increase. The Fed’s terminal rate is expected to hit 3.6 percent by the middle of next year, from the current range of 2.25 percent to 2.5 percent.

ANZ is even more aggressive: “We have revised up our year-end fed funds rate forecast by 25 basis points to 4 percent,” said Tom Kenny, senior international economist at ANZ. “There is an upside risk if services inflation turns out to be more rigid than we anticipate.”

The Federal Reserve raised its benchmark overnight rate by 2.25 percentage points this year, and investors are concerned about the risk of a US recession.

The closely watched gap between 10-year and two-year rates remains in deeply invested territory at minus 28 basis points, meaning the cost of short-term borrowing exceeds long-term rates. An inversion is considered a reliable indicator of a recession in 12 to 18 months’ time.

Australia’s yield curve is far from inverted as domestic economic activity proves resilient. The difference between Australian 10-year and two-year yields stands at 44 basis points.

The Reserve Bank of Australia is expected to raise the cash rate next month for the fifth straight policy meeting.

Interbank futures indicate a 50-50 chance of a 0.5 percentage point hike in September and a peak rate of 3.7% by May 2023. The central bank raised its benchmark rate by 1.75 percentage points this cycle in the fastest hardening in modern history. .

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