Our view is that the Aussie will be broadly flat in Q4 as the RBA cuts rates once more and US-China tensions ease, but remain unresolved, creating persistent uncertainty.
The RBA’s three cut easing cycle this year has improved business sentiment, by some measures, and indicators of the housing market indicate looser rates are filtering through to consumers also.
However, given the economy’s reliance on external demand from China in particular, continued uncertainty from US-China trade will keep the RBA solidly on the defensive. This is especially true as China’s economy is likely to slow further in Q4.
The RBA’s most recent statement was solidly dovish, but was reasonably optimistic about the economy, expressing hopes of a “gentle turning point”, while emphasizing that the economy was not near full employment and conditions could remain loose for some time.
The tone of recent data releases has been mixed, with manufacturing survey data picking up but consumer confidence dropping, while the labour market has remained robust on the whole.
The AIG Performance of Manufacturing Index has risen for three consecutive months since June’s negative reading, with the employment index rising solidly into expansionary territory.
Combined with soft consumer confidence data and ongoing US-China tensions, this is likely to be enough to prompt the RBA into one more rate cut this year.