(06 AUGUST 2019) DAILY MARKET BRIEF 2：AUD upward bias subdued as trade war unnerves RBA members

Constructive developments on Aussie are reversing as trade tensions intensify. Although the Reserve Bank of Australia abstained from cutting rates for a third time this year, hopes of a pause in rate cuts are subdued, as the forward guidance confirms that further easing in monetary policy is likely. Despite a rebound in June's trade data, it appears that the outlook on the trade front is not that favorable, given that Australia's four main trading partners are in trade war mode, a situation that is expected to directly affect the Australian economy in the future.

As stated by RBA Governor Philip Lowe, investors can expect further expansionary monetary policy in order to support labor and inflation as consumption and wage growth should slowdown in Q3. Forecasts even indicate a decline in RBA’s Cash Rate as early as October 2019. Trade data from June printed an impressive surplus of AUD 8 billion (prior: AUD 5.745 billion), an historical high, due to abnormal contribution from non-rural goods (i.e. iron ore and coal). Yet the trend is likely to turn as the recent trade standoff and escalation of tit-for-tat actions of both Japan and South Korea will weigh on Australia’s exports. On a side note, South Korean Ministry is expected to announce details of additional sanctions against Japan this week. Despite the recent rebound in AUD, we expect the increase to be limited, as a decline in RBA Cash Rate is expected at the turning point considering current market settings.

Currently trading at 0.6788, AUD/USD is heading along 0.6770 short-term.